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Wealth Management

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EXECUTIVE SUMMARY My project is on Financial Planning and Wealth Management. I have decided to take up this project because I had interest in the subject matter and wanted to learn more about Wealth Management. Financial Planning as the name suggests manages portfolio of every category of persons. Wealth Management is targeted at investors who want to improve their current approach to investment in shares and securities and other fixed income options. Whatever be their investment approach like active, research based or otherwise, it is clear that investment has become a more involved activity.

It calls for awareness and understanding of the business. It also gives an opportunity to investors to interact with its investment team.

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This may enable investors to gain insights into the investment process and better understand the performance of their portfolio. Financial Planning and Wealth Management means not just knowing about the shares and securities but also requires knowledge about Stock Exchange, Depository System, Dematerialization, Taxation on such transactions, knowledge about Mutual Funds, Bonds, Debentures, Fixed Deposits etc.

I tried to cover all this aspects in this project so that one can get complete insight into all the options available for financial planning of an Individual. Objective of the project: – “MONEY SAVED IS MONEY EARNED. ” We all must have heard it sometimes or the other. The main objective of the study is directed towards this motive. Every individual or any organization is always interested in increasing its earnings.

For this purpose the surplus fund is always invested outside so that there is proper utilization of financial resources, funds will not remain idle and there will be return on investment, which increases the profit of the organization. How this aim is achieved and what are the different ways of managing the portfolio, what are the different factors which one must know etc. are tried to be covered while preparing this project. Research Methodology: The information is gathered from Primary and Secondary sources. Primary sources: – Personal visits. Secondary sources: – Books, Sites, Search Engines, Presentations & Brochures.

Limitations: Most of the information is collected from secondary sources, so the limitations of the secondary sources are applicable to this project. Basic Concept Investment An investment is a sacrifice of current money or other resources for future benefits. Portfolio The set of all securities held by an investor is called his portfolio. The portfolio may contain just one security. However, since in general no one puts all one’s eggs in one basket, it will contain several securities. Such a portfolio is known as diversified portfolio. A portfolio can consist of any combination of shares, bonds, derivatives and such .

It means the total holdings of securities belonging to any person. Portfolio Management refers to the selection securities and their continuous shifting in the portfolio to optimize returns suit to object of an investor. The following three major activities are involved in an efficient portfolio management: a) Identification of assets or securities, allocation of investment and identifying assets classes. b) Deciding about major weights/ proportion of different assets/ securities in the portfolio. c) Securities selection within the assets classes as identified earlier. Why should you invest?

Simply put, you should invest so that your money grows and shields you against rising inflation. The rate of return of on investments should be greater than the rate of inflation, leaving you with a nice surplus over a period of time. Whether your money is invested in stocks, bonds, mutual funds or certificates of deposit (CD), the end result is to create wealth for retirement, marriage, collage fees, vacations, and better standard of living or to just pass on the money to the next generation. Also, it’s exciting to review your investment returns and to see how they are accumulating at a faster rate than your salary.

The different alternatives of investment There are following alternatives available for Investment – 1) High Risk High Gain modes of Investments a) Shares b) Derivatives c) Mutual Funds 2) Fixed interest most secured mode of Investments a) Debenture/Bonds b) Fixed Deposit c) Government Instruments (e. g. PPF, Indira & Kisan Vikas Patra, National Saving Schemes) d) Life Insurance 3) Investment into House Property & Gold Jewelry A brief preview of different investment alternatives is given below: Shares Investment in shares of companies is investing in equities. Stocks/shares can be bought/sold from the exchanges. Secondary market) or via IPO’s-Initial Public Offerings (Primary market). Derivatives Derivative is a product whose value is derived from the value of one or more basic variables, called bases (underling assets, index, or reference rate), in a contractual manner. The underlying assets can be equity, forex, and commodity or any other assets. Futures A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Stock Futures on certain specified Securities and Interest Rate Futures are available for trading at NSE.

All the futures contracts are settled in cash. Options An Option is a contract, which gives the right, but not an obligation, to buy or sell the underlying at a stated date and at a stated price. While a buyer of an option pays the premium and buys the right to exercise his option, the writer of an option is the one who receives the option premium and therefore obliged to sell/buy the assets if the buyer exercises it on him. Mutual Fund Mutual Fund is a mechanism for pooling the resource by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in offer documents.

Mutual Fund issues units to the investors in accordance with the quantum of money invested by them. Investors of mutual fund are known as unit’s holders. The profits or losses are shared by the investors in proportion to their investments. The mutual funds normally come out with number of schemes with different investment objectives, which are launched from time to time. A mutual fund is required to be registered with the Securities and Exchange Board of India (SEBI), which regulates securities markets before it can collect funds from the public. Debentures A debenture represents the smallest unit of public lending to a company.

Debenture is also a form of a secured loan. Secured debenture implies that should a company default in its obligations towards debentures holders in the repayment of their interest and principal, in law, the charged assets can be sold off for meeting such obligations. Thus, debenture holders are investors who assume relatively little risk on their investment and accordingly the returns they can expect to earn are lower than that of ordinary shareholders. Like shares, they are also represented in the form of a certificate. The common face value for debentures in India is Rs. 100.

Unlike the uncertain stream of dividends, which a shareholder receives; a debenture holder receives a fixed stream of interest. Payment of such interest is a legal obligation on the part of company. Bond Bond is a debt instruments that obligates the issuer to pay to the bondholder the principal (the original amount of the loan) plus interest. Thus, a bond is essentially an I. O. U. (I owe you contract) issued by a private or governmental corporation. The corporation “borrows” the face amount of the bond from its buyer, pays interest on that debt while it is outstanding, and then “redeems” the bond by paying back the debt.

Bonds are securities but differ from shares of stock in that stock is an ownership interest (termed “equity”), but bonds are merely “debt”: Therefore a shareholder is an owner, but a bond-holder is merely a creditor. Debenture V/S Bond A bond is more or less the same as a debenture. In India, the terms bonds and debentures are mostly used interchangeably. There is virtually no distinction between the two and the difference if any is subtle enough to be disregarded for all practical purposes. Some however, regard a bond as an American term for a debenture.

Others prefer to reserve the term bonds for public debt securities belonging to the government and public sector undertakings. Different investment options and their current market rate of returns The investment options before you are many. Pick the right investment tool based on the high risk profile, circumstance, time zone available etc. If you feel market volatility is something which you can live with then buy stocks. If you do not want to risk the volatility and simply desire some income, then you should consider fixed income securities.

However, remember that risk and returns are directly proportional to each other. Higher the risk, higher the returns. A brief preview of different investment options is given below: Equities: Investment in shares of companies is investing in equities. Stocks can be bought/sold from the exchanges (secondary market) or via IPO’s-Initial Public Offerings (primary market). Stocks are the best long-term investment option wherein the market volatility and the resultant risk of losses, if given enough time, is mitigated by the general upward momentum of the economy.

There are two streams of revenue generation from this form of investment. 1. Dividend: Periodic payments made out of the company’s profits are termed as dividends. 2. Growth: The price of a stock appreciates commensurate to the growth posted by the company resulting in capital appreciation. On an average an investment in equities in India has return of 25%. Good portfolio management, precise timing may ensure a return of 40% or more. Picking the right stock at the right time would be guarantee that your capital gain i. e. growth in market value of stock possessions, will rise.

Bonds: It is a fixed income (debt) instrument issued for a period of more than one year with the purpose of raising capital. The central or state government, corporation and similar institution sell bonds. A bond is generally a promise to repay the principal along with fixed rate of interest on a specified date, called as the maturity date. Other fixed income instruments include bank fixed deposits, debentures, preference shares etc. The average rate of returns on bonds and securities in India has been around 10-12% p. a. Certificate of Deposits:

These are short- to- medium-terms interest bearing, debt instruments offered by banks. These are low-risk, low return instruments. There is usually an early withdrawal penalty. Savings accounts, fixed deposits, recurring deposits etc are some of them. Average rate of return is usually between 4-8%, depending on which instrument you park your funds in. minimum required investment is Rs. 1, 00,000. Mutual Fund: These are open and close ended funds operated by an investment company which raises money from the public and invest in a group of assets, in accordance with a stated set of objectives.

It’s a substitute for those who are unable to invest directly in equities or debt because of resources, time or knowledge constraints. Benefits include diversification and professional money management. Shares are issued and redeemed on demand, based on the fund’s net asset value, which is determined at the and of each trading session. The average rate of return as a combination of all mutual funds put together is not fixed but is generally more than what earn in fixed deposits. However, each mutual fund will have its own average rate of return based on several schemes that they have floated.

In the recent past, MFs have given a return of 18-30 %. Cash Equivalents: These are highly liquid and safe instruments which can easily converted into cash, treasury bills and money market funds are a couple of examples for cash equivalents. Others: There are also other saving and investment vehicles such as gold, real estate, commodities, art and crafts, antiques, foreign currency etc. However, holding assets in foreign currency are considered more of a hedging tool (risk management) rather than an investment. Shares Shares

The capital of company is usually divided into certain indivisible units of a fixed amount known as Shares. Types of Shares: Shares are of two types: 1. Preference Shares 2. Equity Shares (Ordinary Shares) 1. Preference Shares: Preference Shares are those shares which have: a) A preferential right of payment of dividend at a fixed rate during the life of the company, and b) A preferential right to be repaid of capital when the company goes into liquidation. Types of Preference Shares: I. Cumulative and Non-cumulative Preference Shares II. Participating and Non-participating Preference Shares

III. Redeemable and Irredeemable Preference Shares IV. Convertible and Non-convertible Preference Shares Cumulative Preference Shares- In case of such shares, if dividend in any year cannot be paid due to non-availability of profit, the holders are entitled to get such arrear dividend out of profits of subsequent year or years. Non-cumulative Preference Shares- In case of such shares, if dividend in any year cannot be paid, the right to receive dividend for that year lapses, and holders are not entitled to get such arrear dividend out of profits of subsequent years.

Participating Preference Shares- The holders of these shares, in addition to a fixed rate of dividend, are entitled to shares, with the equity shareholders, the balance of profits in some proportion after the rights of the equity shareholders have been reasonably met. These shareholders are sometimes also allowed to share in surplus assets on the company being wound up. Non-participating Preference Shares- The holders of these shares are entitled to a fixed rate of dividend only and do not share in the surplus profits or assets which all go to the equity shareholders. Redeemable Preference Shares-

These shares, in addition to the preferential right in respect of dividend, enjoy the right to be redeemable, i. e. , to be paid back on /or after a certain date and / or at the option of the company. Irredeemable Preference Shares- Share which are not redeemable are termed as irredeemable ones. Convertible Preference Shares- These shares are given the right of being converted into equity shares within a specified period or at a specified date. Non-convertible Preference Shares- The preference shares without such right of conversion are termed as non-converertible ones. 2. Equity Shares (Ordinary Shares)

Those shares which do not enjoy any preferential right in respect of dividend or repayment of capital. Dividend on these shares is paid at a rate recommended by the directors and declared by the company in general meeting. An equity share represents ownership capital. Equity shareholders collectively own the company. Classification of Equity Shares 1. Stock Market Classification of Equity Shares In stock market parlance, it is customary to classify equity shares are as follow: Blue-chip Shares: Shares of large, well-established, and financially strong companies with an impressive record of earnings and dividends.

Growth Shares: Shares of companies that have a fairly entrenched position in a growing market and which enjoy an above average rate of growth as well as profitability. 2. IPO (Initial Public Offer) IPO: An Initial Public Offer (IPO) is the selling of securities to the public in the primary market. It is the largest source of funds with long or indefinite maturity for the company. Issue Price of IPO 1. At Par: When issue price of share is equal to nominal or face value of share it is called issued at Par. 2. At premium: When goodwill of the company is very good in the market or in the company has already shares in market then company can make. . Further issue at premium where issue price is higher than face value of the share. E. g. – Face value per share is Rs. 10 Current Market price per share Rs. 37. 00 Company can fixed issue price at Rs. 25 to 28 per share Where Premium amount is Rs. 15 to 18 per share. 4. At Discount: Share issued at discount is practically very rare where issue price is less than face value of shares. Depository, Depository Participants & Dematerializations Depository A depository is like a bank wherein the deposits are securities (viz. , shares, debenture, bonds, government securities, units etc. in electronic form. Besides holding securities, a depository also provides services related to transaction in securities. Depository Participant Depository provides its services to investors through its agents called Depository Participants (DPs). Thus the market intermediary through whom the depository services can be availed by the investors is called a Depository Participant (DP). These agents are appointed by the depository with the approval of SEBI. According to SEBI regulations, amongst others, three categories of entities i. e.

Banks, Financial Institution and Members of Stock Exchanges registered with SEBI can become DPs. This system of using the existing distribution channel (mainly constituting DPs) helps the depository to reach wide cross section of investors spread across a large geographical area at a minimum cost. Dematerialization Dematerialization, in short called as ‘demat’, is the process by which physical certificates of an investor are converted to an equivalent number of securities in electronic form and credited in the investor account with his Depository Participant (DP).

The investors can dematerialize only those share certificates that are already registered in their name and belong to the list of securities admitted for dematerialization at the depositories. Procedure of opening a Demat account: Any investor who whishes to avail depository services must first open an account with depository participant of NSDL. The process of opening a demat account is very similar to bank account. The investor can open an account with any depository participant of NSDL. An investor may open an account with several DPs or he may open several accounts with single DP.

There are several DPs offering various depository-related services. Each DP is free to fix its own fee structure. You can open a depository account with any DP convenient to you by following these steps: 1. Fill up the account opening form, which is available with the DP. 2. Sign the DP-client agreement, which defines the rights and duties of the DP and the person wishing to open the account. 3. Receive your client account number (client ID). This client ID along with your DP ID gives you a unique identification in the depository system.

Note: There is no restriction on the number of depository accounts you can open. However, if your existing physical shares are in joint names, be sure to open the account in the same order of names before you submit your share certificates for demat. Documents for verification For the purpose of verification, all investors have to submit the following documents along with the prescribed account opening form. Proof of identity- A beneficiary account must be opened only after obtaining a proof of identity of the applicant.

The applicant’s signature and photograph must be authenticated by an existing account holder or by the applicant’s bank or after due verification made with the original of the applicant’s valid passport, voter id, driving license or PAN card with photograph; and further, Proof of address- The account opening form should be supported with proof of address such as verified copies of ration card / passport / voter id /PAN card / driving license /bank passbook. An authorized official of the participant, under his signature, shall verify the original documents.

In case any account holder fails to produce the original documents for verification within the aforesaid period of 30 days, it must be immediately brought to the notice of NSDL. Failure to produce the original documents within the prescribed time would invite appropriate action against such account holders, which could even include freezing of their accounts. Common Information The processes of opening an account with a depository, nature of such an account, and various factors to be considered for opening a depository account are explained below. Some details are common to all types of accounts.

These are: 1. Name of the holder 2. Date of birth (for individual accounts) 3. Occupation 4. Address & phone/fax number 5. Bank details like name of bank, type of account (current/savings), account number, branch address, MICR, etc. 6. PAN number, if applicable 7. Details of nomination 8. Specimen signatures Procedure to Dematerialize your Physical Share Certificates Fill up a dematerialization request form (DRF), which is available with your DP. Submit your share certificates along with the form; (write “surrounded for demat” on the face of the certificate before submitting it for demat. . Receive credit for the dematerialized shares into your account within 15 days. In case of directly purchasing dematerialized shares from the broker, instruct your broker to purchase the dematerialized shares from the stock exchange link to the depositories. Once the order is executed, you have to instruct your DP to receive securities from your broker’s clearing account. You have to ensure that your broker also gives a matching instruction to his DP to transfer the shares purchased on your behalf into your depository account.

Note: You should also ensure that your broker transfer the shares purchased from his clearing account to your depository account, before the book closure/record date to avail the benefits of corporate action. Stocks traded under Demat Securities and Exchange Board of India (SEBI) has already specified for settlement only in the dematerialized from for 761 particular scripts. Investors interested in these stocks receive share only in demat from without any instruction to your broker. SEBI has instructed the institutional investors to sell 421 scripts only in the demat from.

The share by non institutional investors can be sold in both physical and demat from. As there is a mix of both form of stocks, it is possible if you have purchased a stock in this category, you may get delivery of both physical and demat shares. Advantages of a depository services 1. Trading in demat segment completely eliminates the risk of bed deliveries. 2. In case of transfer of electronic shares, you save 0. 5% in stamp duty. 3. Avoids the cost of courier/notarization/the need for further follow-up with your broker for shares returned for company objection. . No loss of certificates in transit and saves substantial expenses involved in obtaining duplicate certificates, when the original share certificates become mutilated or misplaced. 5. Increasing liquidity of securities due to immediate transfer and registration. 6. Reduction in brokerage for trading in dematerialized shares receives bonuses and rights into the depository account as a direct credit, thus eliminating risk of loss in transit. 7. Lower interest charge for loans taken against demats shares as compared to the interest for loan against physical shares.

RBI has increased the limit of loans availed against dematerialized securities as collateral to Rs. 20 lakh per borrower as against Rs. 10 lakh per borrower in case of loans against physical securities. RBI has also reduced minimum margin to 25% for loan against dematerialized securities, as against 50% for loans against physical securities. Stock Exchange and Stock Index Stock Exchange Stock Exchanges are the exclusive centers for trading of securities listing of companies on the local exchange is mandatory to provide an opportunity to investors to invest in the securities of local companies.

The markets are closed on Saturdays and Sundays. The Bombay Stock Exchange (BSE) and the National Stock Exchange of India Ltd (NSE) are the two primary exchanges in India. The BSE has over 6000 stocks listed and NSE has around 1500 shares listed. Both the exchanges have switched over from the open outcry trading system to a fully automated computerized mode of trading known as BOLT (BSE ON LINE TRADING) and NEAT (NATIONAL EXCHANGES AUTOMATE TRADING) system. It facilities more efficient processing, automatic order matching, faster execution of trades and transparency. In addition, there are 22 regional stock exchanges.

However, the BSE and NSE have established themselves as the two leading exchanges and account for about 80 percent of the equity volume traded in India. Total 24 stock exchanges in India in which NSE & BSE are nation wise exchanges having nationwide operation. [pic] NSE (NATIONAL STOCK EXCHANGE) The National Stock Exchanges (NSE) is India’s leading stock exchange covering various cities and towns across the country. NSE was set up by leading institution to provide a modern, fully automated screen-base trading system with national reach. NSE has the S&P NSE 50 index (Nifty) which consists of fifty stocks.

NSE commenced operations in the Wholesale Debt Market (WDM) segment in June 1994. The Capital Market (equities) NSE commenced operations in November 1994 and operations in Derivatives segment commenced in June 2000. [pic] BSE (BOMBAY STOCK EXCHANGE) The Stock Exchanges, Mumbai, popularly known as “BSE” was established in 1875 as “The Native Share and Stock Brokers Association”. It is oldest one in Asia, even older than the Tokyo Stock Exchange, which was established in 1878. It is a voluntary non-profit making Association of Persons (AOP) and is currently engaged in the process of converting itself into demutualised and corporate entity.

It has evolved over the years into its present status as the premier Stock Exchange in country. The primary index of BSE is BSE Sensex comprising 30 stocks. It is the first stock exchange in the country to have obtained permanent recognition in 1956 from the Government of India under the securities contracts (Regulation) act, 1956. Different other stock exchanges in India: Multi Commodities Exchange Association Ltd. Calcutta Stock Exchange Association Ltd. Delhi Stock Exchange Assoc Ltd. Hyderabad Stock Exchange Ltd. Inter-connected Stock Exchange of India Different stock exchange outside India NASDAQ: United State Stock Exchange

DOW JONES: United Stock Exchange NIKKEI: Japan Stock Exchange NYSE: New York Stock Exchange Index It is a number used to represent the change in a set of values between a base time period and another time period. Stock Index The index under reference is stock index, which is computed by various stock exchanges in the country. When a stock is traded in any stock market than there are always movements in its price either upward or downward. There is need to measure such movement in stock market prices. These movements either way cannot be known unless some methodology is adopted for construction of Stock Price Index.

By keeping a track of the index, it is always possible to know the over-all market movement/sentiment. This helps an investor or a dealer in securities to make a decision as to which stock he should buy or sell, in addition to any other criteria. A Stock Index is some average of the prices of stocks, and the movement of the index tells us about the price movement (capital gains) of all stocks, of course, in any given time period, some fall in value and the aggregate change in an index is only a crude summary of the overall market movement. Different types of index ) BSE Sensex = 30 scrip’s b) S&P CNX NIFTY = 50 script’s c) BSE – 100 d) BSE – 200 e) BSE Dollex – In Dollar Terms f) BSE – 500 What is a Stock Index? Index is an indicator of broad market. Any index is an average of its constituents. BSE Sensex is average price of 30 selected stocks – whereas weight is the market capitalization of individual stock and Nifty is of 50 stocks. Stock Index: Represents changes in value of a set stock which constitute the index over a base year. Market Capitalization: It is the product of stock price number of shares issued by the company.

Example: suppose there are 2 stocks A&B |Company |Share Outstanding (MN) |Price |Market Capital. (Rs. ) | | | | | | |A |10 |100 |1000. 00 | | | | | | |B |1 |150 |150. 0 | | | | | | | | |Base |1150. 00 | Supposing on day 5 Currently A is traded at RS. 200 = 2000 B is traded at Rs. 200 = 2000 Current Market Capitalization Index = ————————————- *100 Base Market Capitalization 2200 Index = ———————–*100 1150 Online Share Trading

Working of Share Market To learn more about how you can earn on the stock market, one has to understand how it works. Types of Trading 1. Old System of share trading- Trading at Floor through open outery- Earlier share was purchased or sold on the floor of stock exchanges manually by crying for “Boli” and best price is transacted first. Now this system is obsoleted and replaced by fully electronic mode of share trading. 2. New System of trading a) SBTS-Screen Based Trading System by Punch – Nationwide one line fully automated b) Internet / WAP: Trading also made by investor itself through Internet or WAP (Wireless) pic] How Share Trading Takes Place Through Terminal? The purchase or sale of share is made by dealer through Stock Exchanges. Thus Stock Exchange is the place where share is purchased or sold. Steps of Online Share Trading Step 1: Placing Purchase Order A person desirous of buying shares in the market has to first place his order with a broker. When the buy order of the shares in communicated to the broker he routes the order through his system to the exchange. The order stays in the queue exchange’s systems and gets executed when the orders logs on to the system within buy limit that has been specified.

Order Types and Conditions The system allows the trading members to enter orders with various conditions attached to them as per their requirements. These conditions are broadly divided in to Time Conditions, Quantity Conditions, Price-Conditions and Other Conditions. The order types and conditions are summarized below: a) Time Conditions Day: A Day order, as the name suggests is an order that is valid for the day on which it is entered. If the order is not executed during the day, the system cancels the order automatically at the end of the day. Note: By default, the system assumes that all order entered are Day Orders.

IOC: An Immediate or Cancel (IOC) order allows the users to buy or sell securities as soon as the order is released into the system, failing which the order is cancelled from the system. Partial match is possible for the order, and the unmatched portion of the order is cancelled immediately. b) Quantity Conditions DQ: An order with a Disclosed Quantity (DQ) allows the user to disclose only a portion of the order quantity to the market. For e. g. if the order quantity is 10,000 and the disclosed quantity is 2,000 then only 2,000 is released to the market.

After this quantity is fully, a subsequent quantity of 2,000 is disclosed. Thus, total five disclosures with the same order number are shown one after the other in the market. c) Price Conditions Market: Market orders are orders for which price is specified as ‘MKT’ at the time the order is entered. For such orders, the system determines the prices i. e. purchase price is the market price at the time of execution of order. Stop-loss: This facility allows the user to release an order into the system, after the market price of the security reaches or crosses a threshold price called trigger price.

Example: If for stop loss buy order, the trigger is Rs. 93. 00, the limit price is Rs. 95. 00 and the market (last traded) price is Rs. 90. 00, and then this order is release into the system once the market price reaches or exceeds Rs. 93. 00. This order is added to the regular lot book with time of triggering as the time stamp, as a limit order of Rs. 95. 00. All stop loss orders are kept in a separate book (Stop Loss Book) in the system until they are triggered. Trigger price: Price at which an order gets triggered from the Stop Loss Book. Limit price: Price of orders after triggering from Stop Loss Book.

If the limit price is not specified, the trigger price is taken as the limit price for the order. The stop loss condition is met under the following circumstances: Sell Order – A Sell Order in the stop loss book gets triggered when the last traded price in the normal market reaches or falls below the trigger price of the order. Buy Order- A Buy Order in the stop loss book gets triggered when the last traded price in the normal market reaches or exceeds the trigger price price of the order. When a stop loss order with IOC condition enters the system, the order is release in the market after it is triggered.

Once triggered the order scans the counter order book for a suitable match to result in a trade or else is cancelled by the system. d) Other conditions PRO/CLI/WHS (Proprietor/Client/Warehouse): A user can enter orders on his own account or on behalf of clients or warehouse order on behalf of institutional clients. By default; the system assumes that the user is entering orders on the trading member’s own account. The client account field is an alphanumeric field. It is mandatory to enter the client account number in the field provided in case the user enters orders on behalf of clients or warehouse order on behalf of institutional clients.

Order Modification &Cancellation Order modification: All orders can be modified in the system till the time they do not get fully traded and only during markets hours. 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. Step 2: Execution of Purchase Order A Purchase Order is executed when order is matched. Order matching The buy and sell orders are matched on priority basis. Matching Priority

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. E. g. consider the following buy orders given by Mr. C. P. ashok & Mr. Kaustav Sett: 1)100 shares @ Rs . 72. 75 at time 10:30 a. m. 2) 500 shares @ Rs. 35. 05 at time 10:30 a. m. The second order price is greater than the first order price and therefore is the best buy order. c) 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 buy orders given by Mr. C. P. Ashok & Mr.

Kaustav Sett: 1) 200 shares @ Rs. 72. 75 at time 10:30 a. m. 2) 300 shares @ Rs. 72. 75 at time 10:31 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 first order is the best buy 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 stamped 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. Validation Checks While matching orders, the system performs following validation checks: a) If the turnover limit of any trading member has already exceeded, a trade does not take place. b) If the participant of any of the orders is “Suspended” the trade does not go through.

Step 3: Availability of Purchased Shares in Demat a/c Purchased shares will be available in demat a/c in T+2 i. e. on transaction day+2nd day. E. g. if a share purchased on Monday then it will be available in demat a/c on Wednesday (T+2). Step 4: Placing Sale Order A person desirous of selling shares in the market has to first place his order with a broker. When the sale order of the share is communication to the broker he routes the order through his system to the exchange. The order stays in the queue exchange’s system and gets executed when the order logs on to the system within sale limit that has been specified. Note: . Intra –day trading or Jobbing or Fatka: In this case shares purchased is sold in same day before closing of on line trading time i. e. before closing of on line trading time i. e. before 3. 30 p. m. 2. BTST (Buy Today Sale Tomorrow): This facility is available in icicidirect. com where share purchased today can be sold tomorrow during market hour. 3. BNST (Buy Now Sale Tomorrow): This facility is available in kotakstreet. com where share purchased today, 75% of such shares can be sold tomorrow and rest 25% shares to be taken as deliver and can be sold next day or later when these shares available in your demat a/c.

Order Types and Conditions It is same as purchase order as given above. Step 5: Execution of Sale Order A sale orders is executed when order is matched. Order Matching The sell orders are matched on priority basis. Matching Priority The unmatched orders are queued in the system by the following priority: a) By price: A sell order with a lower price gets a higher priority. E. g. consider the following sell orders given by Mr. c. p. Ashok & Mr. Kaustav Sett: 1) 100 shares @ Rs. 35. 00 at time 10:30 a. m. 2) 500 shares @ Rs. 35. 05 at time 10:30a. 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 first order is the best buy 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 stamped 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. Step 6: Adjustment of sold Shares in Demat a/c Sold shares will be deducted/adjusted in demat a/c at the end of same trading day. E. g. If a share sold on Monday then it will be deducted in Demat a/c at the end of Monday trading day. Sort Selling Of Shares In this process share is sold without holding and before the end of trading hour of the same day same quantity must be purchased.

This process of trade is when price of share is intended to go down within a day so that at higher price a share is sold and when price go down, the same is purchased within the same day. But if the price goes up then loss will be suffered by the client. E. g. a) Reliance Industries Market Price is Rs. 510. 00 at 10. 00 A. M. Ashok expected that price of the same will go down hence he has sold 100 shares at Rs. 510. 00 without holding of same share (Sort Sale). At 12. 30 P. M. the market price of the same goes down to Rs . 503. 00 at which the same has been purchased. Hence profit @ Rs. 7. 0 (Rs. 510. 00-503. 00=Rs. 7. 00) per share of 100 shares total profit Rs. 700. 00. b) If unfortunately market price goes up to Rs. 515. 00 at 12. 30 P. M. at which the same has been purchased then loss @ Rs. 500 (Rs. 510. 00-515. 00=Rs-5. 00) per share of 100 shares total loss Rs. 500. 00. If sort sale shares not purchased within the day then same share is purchased by the Stock Exchange on behalf of client by Auction. Brokerage, Service Tax & STT with Margin Money & Exposure Limit For Stock Brokerage: Brokerage (except Service Tax & STT) is charged for online trading are as below: 1.

Intra-day trading: Brokerages for intra-day (i. e. purchase and sales in same day) trading differ from broker to broker and on the basis of volume of transaction as below: a) Icicidirect. com: It charges 10 paise per hundred i. e. 0. 10% on purchase and same on sale on value of share. E. g. Reliance Industries purchased 100 shares @ 500 and sold @ 510. Brokerage on purchase = (500*0. 10%)*100 =0. 50*100 = 50/- Brokerage on Sale = (510*0. 10%)*100 =0. 51*100 = 51/- Total 101/- b) Kotakstreet. om: It charge 6 paise per hundred i. e. 0. 06% on purchase and same on sale on value of share. E. g. Reliance Industries purchased 100 shares @500 and sold @ 510 Brokerage on purchase = (500*0. 06%) *100 = 0. 30*100 = 30. 00/- Brokagerage on sale = (510*0. 06%) *100 = 0. 301*100 = 30. 10/- Total 60. 10/- c) Broker or sub-broker: It charges 3 paise to 10 paise differ from client to client and city to city. 2. Delivery Based Transaction: In case of Delivery Based Transaction (i. e. shares purchased today will be sold after the T+2 i. e. fter share coming into demat a/c) a) Icicidirect. com: It charges 75 paise per hundred i. e. 0. 75% on purchase and same on sale on value of share. E. g. Reliance Industries purchased 100 shares @ 500 and sold @ 525 after 5 days. Brokerage on purchase = (500*0. 75%)*100 = 3. 75*100 = 375/- Brokerage on Sale = (525*0. 75%)*100 = 3. 93*100 = 393/- Total 768/- b) Kotakstreet. com: It charge 59 paise per hundred i. e. 0. 59% on purchase and same on sale on value of share. E. g.

Reliance Industries purchased 100 shares @500 and sold @ 525 after 5 days. Brokerage on purchase = (500*0. 59%) *100 = 2. 95*100 =295/- Brokerage on sale = (525*0. 59%) *100 = 3. 10*100 =310/- Total 605/- c) Broker or sub-broker: It charges 15 paise to 60 paise per 100 rupees differ from client to client and city to city. Selection of Good Stock (Scrip) for Long Term Investment Fundamental Analysis Fundamental Analysis is the analysis of Financial Statements (i. e. Balance Sheet & P/L A/C), different ratio (e. g. P/E Ratio, Debt/Equity Ratio, EPS etc. ) and company Management policies.

Benchmarks There are a few benchmarks which are easily available and can be of great use in screening good stocks. Revenues/Sales growth Revenues are how much the company has sold over a given period. Sales are the direct performance indicators for companies. The rate of growth of sales over the previous years indicates the forward momentum of the company, which will have a positive impact on the stock’s valuation. Bottom line growth The bottom-line is the net profit of a company. The growth in net profit indicates the attractiveness of the stock. The expected growth rate might differ from industry to industry.

For instance, the IT sector’s growth in bottom-line could be as high as 65-70% from the previous years whereas for the old economy stocks the range could be anywhere in range of 10-15%. ROI – Return on Investment ROI in layman terms is the return on capital invested in business i. e. if you invest Rs 1 crore in men, machines, land and material to generate 25 lakhs of net profit, then the ROI is 25%. Again the expected ROI by market analysts could differ form industry to industry. For the software industry it could be as high as 35-40%, whereas for a capital-intensive industry it could be just 10-15%.

Volume Many investors look at the volume of shares traded on a day in comparison with the average daily volume. The investor gets an insight of how active the stock was on a certain day as compared with previous days. When major news are announced, a stock can trade tens of times its average daily volume. Volume is also an indicator of the liquidity in a stock. Highly liquid stocks can be traded in large batches with low transaction costs. Illiquid stocks trade infrequently and large sales often cause the price to rise/fall dramatically. Illiquid stocks tend to carry large spreads i. . the difference between the buying price and the selling price. Volume is a: key way to measure supply and demand, and is often the primary indicator of a new price trend. When a stock moves up’in price on unusually high volumes it could indicate that big institutional investors are accumulating the stock. When a stock moves down in price on unusually heavy volume, major selling could be the reason. Company management The quality of the top management is the most important of all resources that a company has access to. An investor has to make a careful assessment of the ompetence of the company management as evidenced by the dynamism and vision. Finally, the results are the single most important barometer of the company’s management. If the company’s board includes certain directors who are well known for their efficiency, honesty and integrity and are associated with other companies of proven excellence, an investor can consider it as favorable. Among the directors the MD (Managing Director) is the most important person. It is essential to know whether the MD is a person of proven competence. Return on Equity

Supposedly Warren Buffet’s favorite number, this measure how much your investment is actually earning. Around 20% is considered good. Debt-to-Equity Ratio This measure how much debt a company-has compared to the equity. The debt-to-equity ratio is arrived by dividing the total debt of the company with the equity capital. You’re looking for a very low number here, not necessarily zero, but less than . 5. If you see it at 1; then the company is still okay. A D/E ratio of more than 2 or greater is risky. It means that the company has a high interest burden, which will eventually affect the bottom-line. Not all debt is bad if used prudently.

If interest payments are using only a small portion of the company’s revenues, then the company is better off by employing debt-pushing growth. Also note capital intensive industries build on a higher Debt/Equity ratio; hence this tool is not a right parameter in such cases. Earnings Per Share (EPS) This ratio determines what the company is earning for every share. For many investors, earnings is the most important tool. EPS is calculated by dividing the earnings (net profit) by the total number of equity shares. Thus, if AB ltd has 2crore shares and has earned Rs 4crore in the past 12 months, it has an EPS of Rs 2.

EPS Rating. Factors the long-term and short-term earnings growth of a company as compared with other firms in the segment. Take the last two quarters of earnings-per-share increase and combine that with the three-to-five-year earnings growth rate. Then compare this number for a company to all other companies in your watch list within each sector and rate the results on how it outperforms all other companies in your watch list in terms of earnings growth. It’s advisable to invest in stocks that rank in the top 20% of companies in your watch list.

This is based on the assumption that your portfolio of stocks in the “Watch List” have been selected by using some basic screening tools so as to include the best of the stocks as perceived and authenticated by the screening tools that you had used. Price / Earnings Ratio (P/E) The P/E ratio as a guide to investment decisions. Earnings per share alone mean absolutely nothing. In order to get a sense of how expensive or cheap a stock is, you have to look at earnings relative to the stock price and hence employ the P/E ratio. The P/E ratio takes the stock price and divides’ it by the last four quarters’ worth of earnings.

If AB Ltd is currently trading at Rs. 20 a share with Rs. 4 of earnings per share (EPS), it would have a P/E of 5. Big increase in earnings is an important factor for share value appreciation. When a stock’s P-E ratio is high, the majority of investors consider it as pricey or overvalued. Stocks with low P-E’s are typically considered a good value. However, studies done and past market experience have proved that the higher the P/E, the better the stock. A Company that currently earns Re 1 per share and expects its earnings to grow at 20% p. a will sell at some multiple of its future earnings.

Assuming that earnings will be Rs 2. 50 (i. e. Re 1 compounded at 20% p. a for 5 years). Also assume that the normal P/E ratio is 15. Then the stock selling at a normal P/E ratio of 15 times of the expected earnings of Rs 2. 50 could sell for Rs37. 50 (i. e. Rs 2. 5*15) or 37. 5 times of this years earnings. Thus if a company expects its earnings to grow by 20% per year in the future, investors will be willing to pay now for those shares an amount based on those future earnings. In this buying frenzy, the investors would bid the price up until a share sells at a very high P/E ratio relative to its present earnings.

First, one can obtain some idea of a reasonable price to pay for the stock by comparing its present P/E to its past levels of P/E ratio. One can learn what a high is and what a low P/E is for the individual company. One can compare the P/E ratio of the company with that of the market giving a relative measure. One can also use the average P/E ratio over time to help judge the reasonableness of the present levels of prices. All this suggests that as an investor one has to attempt to purchase a stock close to what is judged as a reasonable P/E ratio based on the comparisons made.

One must also realize that we must pay a higher price for a quality company with quality management and attractive earnings potential. The Industry Analysis Every industry has to go through a life cycle with four distinct phases: i) Pioneering Stage ii) Expansion (growth) Stage iii) Stagnation (mature) Stage iv) Decline Stage [pic] Life Cycle These phases are dynamic for each industry. You as an investor is advised to invest in an industry that is either in a pioneering stage or in its expansion (growth) stage. It’s advisable to quickly get out of industries, which are in the stagnation stage prior to its lapse into the decline stage.

The particular phase or stage of an industry can be determined in terms of sales, profitability and their growth rates amongst other factors. The Company Analysis There may be situations were the industry is very attractive but a few companies within it might not be doing all that well; similarly there may be one or two companies which may be doing exceedingly well while the rest of the companies in the industry might be in doldrums. You as an investor will have to consider both the financial and non-financial aspects so as to form a qualitative impression about a company.

Some of the factors are as follows: ? History of the company and line of business ? Product portfolio’s strength ? Market Share ? Top Management ? Intrinsic Values like Patents and trademarks held ? Foreign Collaboration, its need and availability for future ? Quality of competition in the market, present and future ? Future business plans and projects ? Tags – Like Blue Chips, Market Cap – low, medium and big caps ? Level of trading of the company’s listed scripts ? EPS, its growth and rating vis-a. -vis other companies in the industry/ ? P/E ratio ? Growth in sales, dividend and bottom line

UNDERSTANDING STOCK MARKET QUOTATIONS It is necessary for an investor to understand the manner in which stock market data is presented in financial publications and how to use it to make investment decisions. An example of the way in which stock market quotes are given in a financial daily is explained below with the help of the stock table in the Economic Times. The Economic Times stock table given the quotes of scrip’s on BSE as well as NSE. Company, Prices, [Vol, Val, Rs. ‘OOOs; Trades] P/E Mcap 52-WKH/L Div% ACC (206. 10) 209, 212-15, 204. 10, 205. 40 [2277257, 475070. 9, 15189] 23. 3 [3524. 5] 225/127 25. 00[03] (205. 80) 207. 10, 212. 20, 204. 15, 205. 55 [4970642, 1037503. 27, 36853] 23. 4 [3527. 0] 225/127 BSE quotes of scrip are given in the first line while the quotes of scrip on, NSE are given below in italics. The name of the scrip is followed by a figure in brackets, which is the previous day’s closing price. The figures that follow are the day’s quotes for the scrip-the first one being the opening quote and the last one being-the closing quote. This is followed by the P/E ratio of the scrip, market capitalization (Rs.

Crore) and the high/low prices in the preceding 52 weeks. The last figure is the dividend (%) declared by the, company along with the year in bracket. Companies other than those with a face value of Rs. 10 per share are indicated by an asterisk (*) before their name. E. g. , Infosys Tech. In the event of a share quoting at a new high or low on BSE, the entire line is shown in bold type with an ‘H’ attached to the high value or ‘L’ to the low value. For a BSE scrip, significant changes in the day’s closing value, as compared to the previous closing, are shown in bold type with a plus or minus sign, as the case may be.

Mutual Fund Mutual Fund Mutual Fund is a mechanism for pooling the resource by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in offer document. Investments in securities are spread across a wide cross section of industries and sectors and thus the risk is reduced. Diversification reduces the risk because all stocks may not move in the same direction in the same proportion at the same time, Mutual fund issues units to the investors in accordance with the quantum of money invested by them.

Investors of mutual funds are known as unit holders. The profits or losses are shared by the investors in proportion to their investments. The mutual funds normally come out with a number of schemes with different investment objectives, which are launched from time to time. A mutual fund is required to be registered with the Securities and Exchange Board of India (SEBI) which regulates securities markets before it can collect funds from the public. Net Asset Value (NAV) of Mutual Funds The performance of a particular scheme of a mutual fund is denoted by Net Asset Value (NAV).

Mutual funds invest the money collected from the investors in securities markets. In simple words, Net Asset Value is the market value of the securities held by the scheme. Since market value of securities changes every year day. NAV of a scheme also varies on day-to-day basis. The NAV per unit is the market value of securities of a scheme divided by the total number of units of the scheme on any particular date. For example, if the market value of securities of a mutual fund scheme is Rs. 200 lakhs and the mutual fund has issued 10 lakhs of Rs. 10 each to the investors, then the NAV per unit of the fund is Rs. 20.

NAV is required to be disclosed by the mutual funds on a regular basis daily or weekly- depending on the type of scheme. Different types of Mutual Fund schemes Schemes according to Maturity Period A mutual fund scheme can be classified into open-ended scheme or closed-ended scheme depending on its maturity period. Open-ended Fund Scheme An open-ended fund or scheme is one that is available for subscription and repurchases on a continuous basis. These schemes do not have a fixed maturity period. Investors can conveniently buy and sell units at Net Asset Vale (NAV) related prices, which are declared on a daily basis.

The key feature of open-end schemes is liquidity. Closed-ended Fund Scheme Closed-ended fund or a Scheme has a stipulated maturity period. E. g. 5-7 years. The fund is open for subscription only during a specified period at the time of launch of the scheme. Investors can invest in the scheme at the time of the initial public issued and thereafter they can buy or sell the units of the scheme on the stock exchanges where the units are’ listed. In order to provide an exit route to the investors, some closed-ended funds give an option of selling back the units to the mutual fund through periodic repurchases at NAV related prices.

SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor i. e. either repurchases facility or through listing on stock exchanges. These mutual funds schemes disclose NAV generally on weekly basis. Schemes according to Investment Objective A scheme can also be classified as growth scheme, Income scheme, or balanced scheme considering its investment objective. Such schemes may be open-ended or closed-ended schemes as described earlier. Such schemes may be classified mainly as follows: Growth/Equity Oriented Scheme The aim of growth funds is to provide capital appreciation over the medium to long-term.

Such schemes normally invest a major part of their corpus in equities. Such funds have comparatively high risks. These schemes provide different options to the investors like dividend option, capital appreciation, etc. and the investors may choose an option depending on their preferences. The investors must indicate the option in the application form. The mutual funds also allow the investors to change the options at a later data. Growth schemes are good for investors having a long-term outlook seeking appreciation over a period of time. Income/Debt Oriented Scheme

The aim of income funds is to provide regular and steady Income to Investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures, government securities and money market instruments. Such funds are less risky compared to equity schemes. These funds are not affected because of fluctuations in equity markets. However, opportunities of capital appreciation are also limited in such funds. The NAVs of such funds are affected because of change in interest rates in the country. If the interest rates fall, NAVs of such funds are likely to increase in the short run and vice versa.

However, long-term investors may not bother about these fluctuations. Balanced Fund The aim of balanced funds is to provide both growth and regular income as such schemes invest both in equities and fixed income securities in the proportion indicated in their offer documents. These are appropriate for investors looking for moderate growth. The generally invest 40-60% in equity and debit instruments. These funds are also affected because of fluctuations in share prices in the stock markets. However, NAVs of such funds are likely to be less volatile compared to pure equity funds.

Money Market or Liquid Fund These funds are also income funds and their aim is to provide easy liquidity, preservation of capital and moderate income. These schemes invest exclusively in safer short-term Instruments such as treasury bills; certificates of deposit, commercial paper are inter-bank call money, government securities, etc. Returns on these schemes fluctuate much less compared to other funds. These funds are appropriate for corporate and individual Investors as a means to park their surplus funds for short periods. Gilt Fund These funds invest exclusively in government securities.

Government securities have no default risk. NANs of these schemes also fluctuate due to change in interest rates and other economic factors as is the case with income or debt oriented schemes. Index Funds Index Funds replicate the portfolio of a particular index such as the BSE Sensitive Index, S NSE 50 index (Nifty), etc. These schemes Invest in the securities in the same weightage comprising of an index. NAVs of suchscheme would rise or fall in accordance with the rise or fall in the index, though not exactly by the same percentage due to some factors known as “tracking error” in technical terms.

Necessary disclosures in this regard are made in the offer document of the mutual fund scheme. There are also exchange-traded index launched by the mutual funds, which are traded on the stock exchanges. Sector specific funds/schemes These are the funds/schemes, which invest in the securities of only those sectors or Industries as specified in the offer documents, e. g. Pharmaceuticals. Software, Fast Moving Consumer Goods (FMCG), Petroleum stocks, etc. The returns in these funds are dependent on the performance of the respective sectors/industries. While these funds may give higher returns, they are more risky compared to diversified funds.

Investors need to keep a watch on the performance of those sectors/industries and must exit at an appropriate time. They may also seek advice of an expert. Tax Saving Schemes These schemes offer tax rebates to the investors under specific provisions of the

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