Equity Markets - Trading and Operations

Equity Markets Trading & Operations
A QUALITY E-LEARNING PROGRAM BY WWW.LEARNWITHFLIP.COM
Chapter 1: Equity Markets Introduction

Capital markets are classified into two categories:
1. Primary Market: Primary market is the market where a financial instrument is first issued/
offered to the public. The interaction is between the issuer and the investor.
2. Secondary Market: Secondary market is the market where the instrument is subsequently
traded (bought and sold). The interaction is between one investor (seller) and another
investor (buyer).
Based on the nature of trading, secondary markets are classified into:
1. Listed Market: Trading where an auction method is used at a physical location, or an
automated mode of trading through an exchange.

For example, stock markets.
2. Over-The-Counter (OTC) or Unlisted Market: A negotiated market without a
physical location where transactions are done via telecommunications. For example,
currency markets.
Trade Life Cycle:

The trade life cycle of a financial instrument has five stages:
1. Issuance
2. Pre-Trade Analysis
3. Trade
4. Post-Trade
5. Asset Servicing
Activities
From an operational perspective, financial market activities can be classified into Front, Middle
& Back office.
Front office handles the trade decision, trade execution and the first stage of the post trade
process i.e. Deal capture
Middle office handles the trade decision support, and any risk management relating to the
deal.
Finitiatives Learning India Pvt. Ltd. (FLIP), 2013. Proprietary content. Please do not misuse!

Back office handles the actual processing and settlement of the transaction.
Market Participants
Trading participants in the equity markets are classified as follows:
Banks & Brokerage Firms: Banks and brokerage firms are members of stock exchanges. The
exchange interacts with the members, who in turn interact with their clients/investors. Banks
and brokerage firms are said to be on the sell side.
Fund or Portfolio Managers: Fund or portfolio managers manage accounts of institutions like
mutual funds or of highly wealthy individuals. They are also called asset managers.
Corporates and Individual Investors: These investors are the ones who invest their
surpluses into the capital markets.
Funds/Investment Managers/Corporates /Individuals are said to be on the buy side.
Other Market Participants

The other market players who facilitate the post trade process are:
Clearing Firms: A clearing firm is an organization that works with the exchanges to handle
confirmation, delivery and settlement of transactions.
Depository: Securities are held in electronic (also called dematerialized) form in the demat
(short for dematerialized) accounts at firms providing depository services.
Custodian Banks: These are banks where the clients hold their demat accounts. They
facilitate clearing and settlement for the client, by interacting with the broker members,
depositories and clearing corporations.
Exchange: The exchange facilitates trade execution and the clearing and settlement of
securities through their various agencies such as clearing firms.
Regulators: SEBI regulates the stock market to ensure smooth functioning.
System Vendors: These are technology service providers who automate the various processes
and ensure processing with minimal manual intervention.

Some Key Terms

American Depository Receipt (ADR): ADR is a negotiable certificate issued by an American
bank. It represents a certain number of shares of a foreign company, which have been
deposited with them.
Bull Markets: It refers to a market that is on the rise. There is a sustained increase in market
share prices. Investor confidence & expectations are high in a bull market.
Intrinsic Value: The intrinsic value of a share, as against its market driven prices, is its
fundamental strength and future potential. This is also called fair value.
Market Capitalization: Market capitalization is the total market value, at the current market
price, of the total number of equity shares issued by a company.
Market Capitalization = Market Price * Number of Outstanding Shares of the
Company
Participatory Notes (P-Notes/PNs): Participatory notes are instruments issued by
registered Foreign Institutional Investors (FIIs) to overseas investors. This is issued to those,
who wish to invest in the Indian stock markets without registering themselves with the market
regulator - SEBI (Securities and Exchange Board of India).
Trading Philosophy:
1. Top-Down Investing- In this approach, an investor considers important parameters like
trends in the economy, industries which these trends favor and companies within these
industries which are likely to benefit the most.
2. Bottom-Up Investing- Bottom-Up investing involves looking for individual shares with
outstanding performance or potential, without considering economic trends.
Classification of Stocks
Stocks are classified into the following categories for trading purposes:
1. Growth Stocks
2. Income Stocks
3. Cyclical Stocks
4. Defensive Stocks
5. Value Stocks

6. Contrarian Stocks
7. Momentum Stocks
Chapter 2: Trade Life Cycle - Issuance

Issuers
Issuers are of mainly two categories.
Governments
To fund their fiscal deficit

To fund a specific project
Corporations
To fund their expansion plans
Corporations issue equity. The process is called issue management and is typically handled by
the merchant banking arm of a bank or a financial institution.
The merchant bank acts as the facilitator to the issue for corporations, by
Advising the form of issuance (debt or equity).
Pricing the issue, based on the company and market conditions.
Processing & Distributing i.e., managing the entire process of selling the issue to the
public.
Investors
There are three categories of investors for any public issue and the issuer may reserve a quota
for each category. They are:
Retail Individual Investor (RII): refers to an investor who applies or bids for securities for
a value of not more than INR 2, 00,000.
Qualified Institutional Buyers (QIBs): This category of investors includes public financial
institutions, commercial banks and other institutions like provident funds, pension funds etc.
High Networth Individuals (HNIs): Investors who do not fall within the above two
categories are called High Networth Individuals (HNIs) or Non Institutional Investors.

SEBI has also allowed the introduction of Anchor investors - under which a buyer can subscribe
up to 30% of the institutional investors quota in an IPO.
Issuance Process
The issuance process is as follows.
Checking the company eligibility:

Filing a prospectus:
Applying for listing at the exchange:
Agreement with the depository for demat:
Bidding process and allotment:

Final Allotment
Once the bids have been collected from investors at various prices, the final offer price is
decided. This is done by accepting bids from the highest price and then going in descending
order till the required issue amount is reached. The last price accepted would be the cut off
price. Shares are allotted to all successful bidders at the cut-off price.
In case the issue is oversubscribed, the allotment is pro-rata.
Private Placement
Under this, the shares are directly placed in large chunks, with a few interested institutions.
Follow on Public Offering

Companies that already have their shares listed in the exchange can raise funds by issuing
additional shares to the public. This is called a Follow on Public Offering (FPO).
A company going in for an FPO has two options.
1. Rights Issue: It may issue these additional shares to the existing shareholders only. This
helps to maintain their ownership in the company. The shareholder has the choice to accept
or reject the rights.
2. Public Offer: It may also issue these shares to the public at large. In this case, the
percentage ownership of the existing owners will reduce.
Underwriters
In case, an issue is undersubscribed, the underwriters take the balance amount.

Foreign Currency Convertible Bonds (FCCB)

FCCBs are debt instruments issued in foreign currency. Like any other bond, investors in this
type of bonds get regular coupon (interest) and principal payments.
However, the difference is that FCCB holders also have an option to convert their bonds into
stocks at a pre-determined price (known as conversion price) at a future date.
Depository Receipts
These are certificates issued by an overseas depository bank against certain underlying
stock/shares of an Indian company. The shares are deposited by the issuing company with the
depository bank. The depository bank in turn tenders these receipts to the investors.
Chapter 3: Trade Life Cycle: Pre-Trade Analysis

Once the instrument comes into existence (issuance), investors start taking interest in the
instrument. They start collecting market information to make a trading decision i.e. whether
to buy or sell the share. This is based on:
1. Fundamental analysis
2. Technical analysis
Fundamental Analysis
This involves analyzing the fundamentals of the company in question. Its a three step process:
1. Analysis of the Economy Evaluate various economic parameters such as
Gross Domestic Product (GDP)- This is the sum total of all products and services
produced by the country
Inflation - Inflation gives signals for future interest rate actions.
Index of Industrial Production (IIP) - It shows the health of the industrial sector.
Fiscal Deficit - It affects the credit rating of the country, and has been the biggest
stumbling block for the poor rating of India.
Political Scenario - Any political uncertainty results in postponement or stoppage of
foreign inflows into the domestic market. The reverse will be true, if a single party gets
a strong mandate from the people..
2. Analysis of the Industry The next step is to analyze factors that affect specific
industries. For example: An appreciating rupee will affect the IT industry.
3. Analysis of the Company Finally analyst should study the specific company within an
industry. Fundamental analysis of a company involves techniques such as:

Vertical Analysis It is used to compare companies of different sizes by expressing all

components of the P&L are expressed as a % of sales and all components of the balance
sheet as a percentage of the total.
Horizontal Analysis It shows the trend across time. Growth of each component of the P&L,
balance sheet over a period (say, 5 years) is shown and analyzed.
Ratio Analysis - Different financial ratios are computed and compared across companies in
the same industry.
Key Financial ratios

1. Earnings Per Share (EPS)= Profit After Tax (PAT)/Total no. of Equity Shares (Issued).
The higher the EPS, the better the companys performance as compared to its peers.
2. Price to Earnings Ratio (P/E Ratio) = Market Price of the Share/Earnings per Share
(EPS). Given the companies with similar fundamentals and future outlook, a company with a
lower P/E ratio is preferred over the other.
3. P/BV Ratio = Market Price of Share/Book Value (BV) of Share. The lower the ratio, the
better the value, for investing in the stock.
4. Book Value per Share = (Equity Share Capital + Reserves)/Total no. of Equity Shares
(Issued). For a running company, the market price should not typically fall below the book
value.
5. Dividend Yield (%) = (Dividend per share/ Market price of share) * 100
The higher the ratio, the more attractive the stock in the long term
6. Volatility (%) = [(Highest Price Lowest Price of the share)/ Market price of share] *
100. Higher the volatility, greater the risk.
Technical Analysis
Technical Analysis is a method of prediction of share price movements based on a study of
price graphs or charts. It is based on the assumption that share price trends are repetitive.
The market analyses historical prices and looks for patterns such as
Double top Formation- Assuming historical patterns will repeat themselves, you will infer
that this stock falls every time the price reaches a particular resistance point.
Double Bottom Formation - Assuming historical patterns will repeat themselves, you will
infer that this stock rises every time the price reaches a particular support point.
Breakout Pattern - Shares move between the support level and the resistance level for
some time. At some point, when the share prices move upwards or downwards beyond the
line, they make a breakout from their price limits.
Head and shoulders - Head and shoulders is a reversal pattern that, when formed, signals
the security is likely to move against the previous trend.

Use of Trendline
It is a straight line drawn to connect the highest or lowest prices of a share over a period in the
immediate past.
If there is a price reversal, that is, if the price rises above a downward trendline or drops
below an upward trendline, technical analysts conclude that a new direction is emerging.
Analytics/Simulation
Institutional clients, who run large equity portfolios also on a regular basis, also conduct what
are known as analytics or simulations. This involves
Creating various scenarios and applying them on their portfolio to study the possible impact.
Taking some extreme situations that have taken place in the past 10 years and applying
them to the portfolio. This is called stress testing.
Chapter 4: Trade Life Cycle: Trading Process

Trading Account
Prior to trading, the investor has to open a trading account with a member of the exchange
called the broker. The account can be of two types:
1. Securities Account: These are for delivery based trades, where actual physical delivery of
securities and cash takes place.

2. Margin Account: Margin account is used for margin trading. These are non delivery based
trades, that is, only the profit or loss on the trade is exchanged - not the actual securities.
KYC Policy
This policy requires member firms to be able to prove that, they know enough about their
clients investment requirements and financial position.
KYC is to prevent:
Money Laundering - Money laundering is the criminal practice of disguising ill-gotten
gains, or dirty money, through a series of transactions.
Insider Trading - Insider trading is only illegal when a person bases their trade of stocks
in a public company on information that the public does not know.
Trading takes place in the secondary market, once the shares get listed in the exchange. It can
happen in two ways:
1. Open Outcry: Exchanges where an auction method is used, at a physical location. Example:
New York Stock Exchange.

2. Order Matching System: Exchanges where trade execution is automated. Example:

Bombay Stock Exchange. The process is as follows:
Order placement -> Order Routing -> Order matching -> Order Execution.
The trading system electronically matches orders on a strict price/time priority.
Types of Orders
1. Price Based Orders
a) Market Orders: Market orders are executed at once, at the prevailing market price. A
market order guarantees execution, but does not guarantee a price.
b) Limit Orders: A limit order is executed at a set price or better, and will not be executed if
that price is not met. A limit order thus specifies a quantity and a price.
c) Stop Loss Orders: This facility allows the trader to input an order when the market price
of the security reaches, or crosses, a threshold price called the trigger price or stop loss
order price.
2. Time Based Orders:
a) Day Order: A Day Order is valid till end of trading day.
b) Good till Cancelled (GTC) Order: A GTC order gets automatically renewed till it gets
executed.
Trading Screen
Disclosed Quantity - An order with a Disclosed Quantity (DQ) allows the user to disclose
only a portion of the order quantity to the market.
Protection % - Market price protection functionality gives an option to a trader to limit the
risk of a market order, within a pre-set percentage of the Last Traded Price (LTP).
Chapter 5: Trade Life Cycle: Trading Strategies

Classification of Stocks
Stocks can be classified into various categories from a trading perspective.
Interest Rate Sensitive Stocks These are the stocks that are benefitted by lower interest
rates. For example, banking sector performance has a direct correlation to interest rates.
Mantra: Market interest rates are expected to move lower BUY!

Policy Driven Stocks The Indian government fixes the prices of petrol, diesel, cooking gas
and kerosene. Any announcements on changes in these prices will directly affect these stocks.
Their price trend has nothing to do with the fundamentals of the company.
Mantra: Stay Out!
Large, Mid & Small Cap Stocks - Stocks can be classified in terms of market capitalization.
Small Cap - Companies that have a market capitalization of less than INR 5000
crores.
Mid Cap - Companies that have a market capitalization between INR 5000 10000 crores.
Large Cap - Companies that have a market capitalization of more than INR 10000 crores.
Small cap stocks tend to carry more risk from a fundamental perspective. Most investors
prefer large cap stocks given its liquidity and relatively lower volatility.
Commodity Pack - These include metals like steel (example: Tata Steel) and aluminum
(example: NALCO). These are stocks that are highly dependent on global commodity prices and
the state of the global economy.
Mantra: When the global economy is on a downturn - SELL!
Stocks Driven by Domestic Demand
These are stocks that derive their growth from domestic demand, and hence are relatively
insulated from global events. For example ITC, Airtel, HUL etc.
Mantra: In times of global turmoil - Stay Invested!
FII Favourites - These are stocks that are preferred by Foreign Institutional Investors and
move in tandem with their operations.
Mantra: If FIIs are pulling out of stock markets, GET RID of those stocks quickly!
Stocks Vulnerable to External Economies - This contains mainly IT and BPO companies. In
fact, any largely export driven company can fall under this category.
Mantra: In times of global turmoil - Get Out!
Industry Specific Factors

1. IT/BPO Industry
A strong dollar or a weak rupee is beneficial to this sector.

Secondly, the key resource in this industry is labor.
Finally one should also look at customer margins on the service contracts.

2. Banking Industry
Traders must look at growth in Net Interest Margins (NIMs) that is interest on loans less
interest on deposits.
The growth in the amount of Non-Performing Assets (NPAs) is also an indicator of decline in
asset quality, and thereby NIMs.
Trading Beta
Beta is a measure of systematic risk. It compares the sensitivity of value of a security with the
movements in the market index.
Beta () = Covariance (Index, Stock)/Variance (Index)
Interpretation of Beta
Beta = 1 indicates that the stock would move precisely in line with the market index. That
is, if the index moves up 5%, the stock will move up 5%.
0 < Beta < 1 indicates that the stock is less volatile as compared to the market index, and
hence lower risk.
Beta > 1 indicates that the stock is more volatile than the market index, and hence higher
risk.
Beta < 0 represents an inverse relationship between the stock and the market index. That
is, when the market goes up, the stock goes down, and vice versa.
Margin Trading
Margin - An investor who purchases securities may pay for the securities in full or may borrow
part of the purchase cost from his brokerage. The portion of the purchase cost that the investor
deposits is called margin.
Margin trading - It is a credit (lending/borrowing) relationship between the brokerage firm

and the investor. Investor uses margin trading
i. To increase his purchasing power,
ii. To leverage his investment that is to magnify the returns on his investments.
How does the lender protect himself?

The investor's credit facility is secured against the purchased securities held in his margin
account as collateral. After selling the securities, the investor has to repay the borrowed money
in accordance with the terms of the margin facility.
Profit earned by the investor = Selling price of stock - Purchasing price of stock interest charged on the margin loan - transaction costs

Margin Rules
The local regulators or the exchanges have rules that govern margin trading.
Brokerage firms can establish their own requirements as long as they are at least as
restrictive as that of the regulators.
Only corporate brokers with a net worth of at least INR 3 crore are allowed to offer margin
trading facility to investors.
An investor needs to enter into an agreement (margin account) with the broker for availing
margin trading facility.
Types of Margins
1. Initial Margin - The portion of the purchase price to be deposited by the investor before
doing the transaction is the initial margin.

2. Maintenance Margin After investor buys a stock on margin, the exchange requires him
to keep a minimum amount of equity in his margin account. The equity in his account is
the market value of his securities less how much he owe to the brokerage firm.
3. Margin Call - If the value of investors shares held with the broker falls below the
maintenance margin percentage, the broker will call for further collateral. This is called a
margin call.
Chapter 6: Trade Life Cycle Post Trade

The post trade stage relates to all the activities relating to clearing and settlement of the
trade and begins once the trade has been executed.
Clearing
The process of transmitting, reconciling and in some cases confirming payment orders or the
security transfer prior to settlement.
Settlement
The act of transferring securities and final funds between two parties.
Settlement can be of two types.
Gross Settlement: In this, settlement happens transaction by transaction.

Net Settlement: Settlement after multiple transactions, for the net amount.

Banking terminology:
Real Time Gross Settlement (RTGS) - Settlement of funds occurs on a

transaction-by-transaction basis, continuously, and in real time, without netting
debits against credits.
Deferred Net Settlement (DNS) - Running balances are calculated on a bilateral
or multilateral basis for each participant vis--vis the other participants, and only net
amounts are settled at pre-specified times during the day.
Settlement Conventions:
Settlement conventions vary across markets and across countries.
Market
India Stock Market
U.S. Stock Market
Government Bonds
Currency Market
Convention
T+2
T+3
T+1
T, T+1, T+2 or even > T+2
T is the date of the transaction and the number denotes the number of working days
(excluding holidays) after the transaction.
Post Trade Clearing Process

Clearing Process Street Side:
The street side workflow for clearing is as follows:
1. Customers place their order with the brokers
2. Brokers execute the trade on the exchange
3. Brokers send execution confirmation to their customers
4. Brokers send trade details to their custodians
5. The exchange sends the trade details to the Clearing Corporation (CC)
6. CC generates confirmation to the brokers and their custodians
7. Brokers affirm the trades through their custodians to the CC.
8. Typically a broker is his own custodian. In that case he affirms the trade himself
The Clearing Corporation now nets all the trades with the counterparties and reduces these
transactions to a single net amount for each security and for cash, at the end of the day. This
happens through a process called Continuous Net Settlement (CNS).

CNS is an automated book entry accounting system, based on multilateral netting. It identifies
each brokers net position on each security traded.
In multilateral netting, the netting is done across all brokers.
Clearing Process Customer Side:

The clearing process on the customer side is part of the execution confirmation. The broker will
inform the customer of the number of shares and the payment due to/from him.
Role of Clearing Corporation:

The buyer and seller are dealing with the exchange. The exchange, through the clearing
corporation, becomes the counterparty to both the buyer and seller.
CC thus acts as the central counterparty and guarantees settlement. This prevents any risk of
default.
Post Trade Settlement Process:

To understand the settlement process, we must know two terms:
Pay-in and Pay-out of both securities and funds.
Pay-in:
Customer side - Customers hold their demat accounts with DPs.
Before pay-in on the street side, the selling customer instructs the DP to transfer security
balances to the broker members share pool account.
Similarly, the buying customer instructs the bank to transfer cash to the broker members cash
pool account.
Street side - The CC will inform the depository to make shares of the companies available from
the relevant broker members account to the CCs securities pool account.
Similarly the CC will inform the clearing bank to make the amount available from relevant
brokers account to the CCs cash pool account.

Pay-out:
Street side - The CC will inform the depository to debit the CCs securities pool account now
and credit the relevant broker members account.
The CC will informs the clearing banks to debit the CCs cash pool account and credit the
relevant broker members account.
Customer side - The relevant broker member will then transfer the cash (less of course the
commission and taxes) to the selling customers account.
From the pool account, the broker member will give the securities to the buying customer
accordingly, by issuing instructions to his DP.
Settlement Process Timelines:

Day
T+2
T+2
Time
11:00 AM
1:30 PM
Activity
Pay-in of securities and funds
Pay-out of securities and funds
Settlement Failures Shortages Handling

A broker/customer sold his shares. On T+2 day he failed to deliver the shares. This is called a
settlement failure.
How does the CC handle this shortage?
T+2 Day - On the securities pay-in day (T+2), the CC identifies short deliveries if any. The
respective broker is debited by an amount equivalent to the securities not delivered by him and
valued at a valuation price.
The valuation price for securities shall be the closing price of such securities on T+1.
T+3 Day - The CC then conducts a buy-in auction for security shortages on the day after the
pay-out day (T+3).
If the buy-in auction price is more than the valuation price, the member is required to make
good the difference.
T+5 Day - The auction trade settles on T+5.

Securities Lending and Borrowing:

Short sale is when you sell something that you do not own.
SEBI has announced a securities lending and borrowing scheme (SLBS), by which you can
borrow securities for such purposes.
SLBS Rules:
National Securities Clearing Corporation Limited (NSCCL) as an approved intermediary has
launched the Securities Lending & Borrowing Scheme (SLBS) from April 21, 2008.
Borrowing Period- The tenure of lending and borrowing ranges from 1 month up to a maximum
period of 12 months. Accordingly the return of securities by borrower is scheduled on the
respective reverse leg settlement day.
Eligibility - In order to become eligible to participate in SLBS, brokers shall have to register as
participants in SLBS.
Participants -Participants desirous of lending or borrowing securities can do so either on their
own account or on behalf of their clients.
Prior to undertaking lending or borrowing of securities on account of clients, the participant
shall enter into an agreement with each client as per the format specified by NSCCL.
The participant shall apply to NSCCL for allotment of a unique client ID for each client who
desires to participate in SLBS.
Steps in SLBS process:
1.
2.
3.
4.
Short
Short
Short
Short
seller
seller
seller
seller
sells shares in the market.

borrows the shares from lender.
buys back the shares from the market.
returns the shares along with the lending fees.
Chapter 7: Trade Life Cycle Asset Servicing

Asset servicing functions begin after the trade has settled, and are performed as long as an
investor holds the security. They relate to post-settlement actions taken by the companies for
their shareholders.

Asset Servicing encompasses the following activities:
Income Collection
Corporate Actions
Reporting
Income Collection:
These relate to dividends for shareholders. Dividends are earnings distributed to the
shareholders. They are expressed as a percentage of Face Value or after the SEBI directive,
expressed as amount per share.
Key Dates:
Declaration Date The date the dividend is announced

Record Date The date, based on which the company will decide who is entitled to the
dividend.
Payment Date the date when the actual payment is made
Ex-dividend date This is the date on which the buyer pays a reduced price for the security
adjusted for the dividend.
Generic Workflow:
1) Capture Detail of Benefit
2) Calculate Entitlement
3) Collect Benefit
4) Credit Owner
Corporate Actions:
These can be:
Mandatory Actions Shareholder has no option but to accept. Merger/Takeover - It is a
combination of two companies into one larger company. The old shares are cancelled and
shares of the new entity are given in exchange.
Stock Split - A company splits the face value of its shares into a smaller denomination to
make it more affordable and accessible to a wider section of the public.
Liquidation - This is when a company becomes insolvent and is forced into liquidation.
Once this happens, all the assets of the company are sold off and the liabilities and
shareholder obligations are paid out of the proceeds.
Spin Off - This is an event where a portion of a company is broken off and established as a
separate legal entity.

Voluntary Actions Shareholder has the option to accept/reject.
Rights Issue - Rights Issue is an offer to existing owners to buy additional shares of the
company. The issue price is typically at a discount to market price.
Convertibles - These are instruments that convert into equity shares, at the option of the
investor.
Tender Offer - This is an open offer to buy shares of a company.
Asset Servicing Reporting

Asset Servicing also encompasses certain other activities such as
Pricing - Custodians price customers portfolios periodically, to inform them of the profit or
loss.
Reporting - The custodian makes periodic reporting of the holdings in each share and the
market value of the positions, to the client.
Chapter 8: Risk Management

Exchanges manage risk by imposing margins on the broker members.
Margins in the cash market segment comprise the following three types:
Value at Risk margin

Extreme Loss margin
Mark to Market margin
Value at Risk (VaR) margin

A VaR Margin is a margin intended to cover the maximum probable loss (in %) that may be
faced by an investor on a single day with a 99% confidence level.
The VaR margin is then computed as follows:
For Group I shares, the VaR margin rate would be the higher of:
3.5 times volatility or
7.5% of value of the transaction.
For Group II shares, the VaR margin rate would be the higher of:
3.5 times volatility or
3 times the VaR of the index*3.

For Group III shares, the VaR margin rate would be equal to:
5 times the VaR of the index*3.
The VaR margin is collected on the gross open position of the member. The gross open position
for this purpose would mean the gross of all net positions across all their clients including their
own open (proprietary) position.
Extreme Loss Margin

The Extreme loss margin for any stock is higher of:
1.5 times the standard deviation of daily returns of the stock price in the last six months.
5% of the value of the position.
MTM Margin
Profit or Loss also called Mark to Market (MTM) is calculated at the end of the day on all open
positions. This is done by comparing the transaction price with the closing price of the share for
the day.
The MTM loss if any is payable before the market opens the next day. This is the MTM margin.
Trading Limits
Besides the margins imposed by the exchange, institutions trading in equities, also impose
internal limits on the individual traders for their proprietary trading portfolio. These are called
market risk limits.
This can be classified into:
Position Limits
Loss Limits
Position limits describe the maximum net open position a trader can have in his equities
portfolio. This could be a limit on an individual stock or on the portfolio as a whole.
Loss limits describe the maximum loss a trader can incur on a single day.

Equity Markets - Trading and Operations

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Equity Markets Trading & Operations

A QUALITY E-LEARNING PROGRAM BY WWW.LEARNWITHFLIP.COM

Chapter 1: Equity Markets Introduction

automated mode of trading through an exchange.

Trade Life Cycle:

Equity Markets Trading & Operations

Other Market Participants

Equity Markets Trading & Operations

Some Key Terms

outstanding performance or potential, without considering economic trends.

Equity Markets Trading & Operations

Chapter 2: Trade Life Cycle - Issuance

To fund their fiscal deficit

To fund their expansion plans

Advising the form of issuance (debt or equity).

Pricing the issue, based on the company and market conditions.

Equity Markets Trading & Operations

Checking the company eligibility:

Bidding process and allotment:

Follow on Public Offering

Equity Markets Trading & Operations

Foreign Currency Convertible Bonds (FCCB)

Chapter 3: Trade Life Cycle: Pre-Trade Analysis

Equity Markets Trading & Operations

Vertical Analysis It is used to compare companies of different sizes by expressing all

Key Financial ratios

Equity Markets Trading & Operations

Chapter 4: Trade Life Cycle: Trading Process

securities and cash takes place.

Equity Markets Trading & Operations

2. Order Matching System: Exchanges where trade execution is automated. Example:

Chapter 5: Trade Life Cycle: Trading Strategies

Equity Markets Trading & Operations

Industry Specific Factors

A strong dollar or a weak rupee is beneficial to this sector.

Equity Markets Trading & Operations

Margin trading - It is a credit (lending/borrowing) relationship between the brokerage firm

How does the lender protect himself?

Equity Markets Trading & Operations

doing the transaction is the initial margin.

Chapter 6: Trade Life Cycle Post Trade

Gross Settlement: In this, settlement happens transaction by transaction.

Equity Markets Trading & Operations

Real Time Gross Settlement (RTGS) - Settlement of funds occurs on a

Post Trade Clearing Process

Equity Markets Trading & Operations

Clearing Process Customer Side:

Role of Clearing Corporation:

Post Trade Settlement Process:

Equity Markets Trading & Operations

Settlement Process Timelines:

Settlement Failures Shortages Handling

Equity Markets Trading & Operations

Securities Lending and Borrowing:

sells shares in the market.

Chapter 7: Trade Life Cycle Asset Servicing

Equity Markets Trading & Operations

Asset Servicing encompasses the following activities:

Declaration Date The date the dividend is announced

Equity Markets Trading & Operations

Voluntary Actions Shareholder has the option to accept/reject.

Asset Servicing Reporting

Chapter 8: Risk Management