AMRAPALIAADYA PVT. LTD.

Project Report
On Stock Market
Dhruv Kumar (Asia Pacific Institute of Management)
4/18/2012

To, Mr. ASHISH SINGH

CONTENTS
1)

Introduction about AmrapaliAadya Pvt. Ltd. Introduction about Stock Market Major Stock exchanges around the world Stock exchanges in India BSE, NSE and SEBI Difference between Depository and Depository Participant Difference between Broker and Depository Participant Financial product

2) 3) 4)
5)

6) 7) 8)

(a) Shares (b) Bonds (c) Treasury bills (d) CDs (e) Annuities (f) Mutual fund (g) Derivative products (i) Futures (ii) Options (h) Complex financial products
9)

Financial markets

(a) Money market

(b) Capital market

(i) Primary market a. IPO b. Rights issue(to existing shareholders)

c. Preferential shares (ii) Secondary market a. Auction market b. Dealer market (iii) (iv) OTC market Third & Fourth market

10) Involved risks 11) Analysis tools (a) Technical analysis (b) Fundamental analysis

Introduction about AmrapaliAadya Pvt Ltd ( please leave this topic for now )

Introduction (Stock market)

A stock market or equity market is a public entity (a loose network of economic transactions, not a physical facility or discrete entity) for the trading of company stock (shares) and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately. The stocks are listed and traded on stock exchanges which are entities of a corporation or mutual organization specialized in the business of bringing buyers and sellers of the organizations to a listing of stocks and securities together. The largest stock market in the United States, by market capitalization, is the New York Stock Exchange (NYSE). In Canada, the largest stock market is the Toronto Stock Exchange. Major European examples of stock exchanges include the Amsterdam Stock Exchange, London Stock Exchange, Paris Bourse, and the Deutsche Brse (Frankfurt Stock Exchange). In Africa, examples include Nigerian Stock Exchange, JSE Limited, etc. Asian examples include the Singapore Exchange, the Tokyo Stock Exchange, the Hong Kong Stock Exchange, the Shanghai Stock Exchange, and the Bombay Stock Exchange. In Latin America, there are such exchanges as the BM&F Bovespa and the BMV. Participants in the stock market range from small individual stock investors to large hedge fund traders, who can be based anywhere. Their orders usually end up with a professional at a stock exchange, who executes the order of buying or selling.

Some exchanges are physical locations where transactions are carried out on a trading floor, by a method known as open outcry. This type of auction is used in stock exchanges and commodity exchanges where traders may enter "verbal" bids and offers simultaneously. The other type of stock exchange is a virtual kind, composed of a network of computers where trades are made electronically via traders. Actual trades are based on an auction market model where a potential buyer bids a specific price for a stock and a potential seller asks a specific price for the stock. (Buying or selling at market means you will accept any ask price or bid price for the stock, respectively.) When the bid and ask prices match, a sale takes place, on a first-come-first-served basis if there are multiple bidders or askers at a given price. The purpose of a stock exchange is to facilitate the exchange of securities between buyers and sellers, thus providing a marketplace (virtual or real). The exchanges provide real-time trading information on the listed securities, facilitating price discovery.

The New York Stock Exchange is a physical exchange, also referred to as a listed exchange only stocks listed with the exchange may be traded. Orders enter by way of exchange members and flow down to a floor broker, who goes to the floor trading post specialist for that stock to trade the order. The specialist's job is to match buy and sell orders using open outcry. If a spread exists, no trade immediately takes placein this case the specialist should use his/her own resources (money or stock) to close the difference after his/her judged time. Once a trade has been made the details are reported on the "tape" and sent back to the brokerage firm, which then notifies the investor who placed the order. Although there is a significant amount of human contact in this process, computers play an important role, especially for so-called "program trading". The NASDAQ is a virtual listed exchange, where all of the trading is done over a computer network. The process is similar to the New York Stock Exchange. However, buyers and sellers are electronically matched. One or more NASDAQ market makers will always provide a bid and ask price at which they will always purchase or sell 'their' stock.

Major Stock Exchanges (Year ended 31 December 2011)

Market Trade Capitalizatio Ran Value Economy Stock Exchange Location n k (USD (USD Billions) Billions) United States NYSE Euronext (US & New York 1 14,242 20,161 Europe Europe) City United States NASDAQ OMX (US & North New York 2 4,687 13,552 Europe Europe) City 3 Japan Tokyo Stock Exchange Tokyo 3,325 3,972 United 4 London Stock Exchange London 3,266 2,837 Kingdom 5 China Shanghai Stock Exchange Shanghai 2,357 3,658 6 Hong Kong Hong Kong Stock Exchange Hong Kong 2,258 1,447 7 Canada Toronto Stock Exchange Toronto 1,912 1,542 8 Brazil BM&F Bovespa So Paulo 1,229 931

Ran k

Economy

Stock Exchange

Market Trade Capitalizatio Value Location n (USD (USD Billions) Billions) 1,198 1,185 1,090 1,055 1,031 1,007 996 985 789 771 1,197 1,758 887 2,838 1,226 148 2,029 589 372 514

9 10 11 12 13 14 15 16 17 18

Australian Securities Sydney Exchange Germany Deutsche Brse Frankfurt Switzerland SIX Swiss Exchange Zurich China Shenzhen Stock Exchange Shenzen Spain BME Spanish Exchanges Madrid India Bombay Stock Exchange Mumbai South Korea Korea Exchange Seoul National Stock Exchange of India Mumbai India Johannesbu South Africa JSE Limited rg Russia MICEX Moscow Australia

STOCK EXCHANGES IN INDIA Exchanges

Ahmedabad Stock Exchange Bangalore Stock Exchange Bhubaneshwar Stock Exchange Bombay Stock Exchange

Location
Ahmedabad Bangalore Bhubaneshwar Mumbai

Founded
1894 1963 1956 1875

Listin gs
2000 600

5,034

(Bombay) Calcutta Stock Exchange Coimbatore Stock Exchange Cochin Stock Exchange Delhi Stock Exchange Association Guwahati Stock Exchange Hyderabad Stock Exchange Kolkata (Calcutta ) Coimbatore Cochin (Kochi) New Delhi Guwahati Hyderabad 1830 1978 1989 1947 1983 1943 1998 1989 2008 1984 1983 1928 1920 1956 1500 750 900 3000 3500+

Inter-connected Stock Exchange Mumbai of India Jaipur Stock Exchange MCX Stock Exchange Mangalore Stock Exchange Ludhiana Stock Exchange Association Jaipur Mumbai Mangalore Ludhiana

Madhya Pradesh Stock Exchange Indore Madras Stock Exchange Meerut Stock Exchange Madras (Chennai) Meerut

Exchanges

Location

Founded
1992 1990 1982 1989

Listin gs
1398

National Stock Exchange of India Mumbai OTC Exchange of India Pune Stock Exchange Saurashtra Kutch Stock Mumbai Pune Rajkot

Exchange United Stock Exchange of India UP Stock Exchange Vadodara Stock Exchange Mumbai Kanpur 2010 27th August, 1982 850

Vadodara/Barod 1990 a

The BSE, NSE and the SEBI

Most of the trading in the Indian stock market takes place on its two stock exchanges: the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). The BSE has been in existence since 1875. The NSE, on the other hand, was founded in 1992 and started trading in 1994. However, both exchanges follow the same trading mechanism, trading hours, settlement process, etc. At the last count,

the BSE had about 4,700 listed firms, whereas the rival NSE had about 1,200. Out of all the listed firms on the BSE, only about 500 firms constitute more than 90% of its market capitalization; the rest of the crowd consists of highly illiquid shares. Almost all the significant firms of India are listed on both the exchanges. NSE enjoys a dominant share in spot trading, with about 70% of the market share, as of 2009, and almost a complete monopoly in derivatives trading, with about a 98% share in this market, also as of 2009. Both exchanges compete for the order flow that leads to reduced costs, market efficiency and innovation. The presence of arbitrageurs keeps the prices on the two stock exchanges within a very tight range. NSE pioneering efforts include: Being the first national, anonymous, electronic limit order book (LOB) exchange to trade securities in India. Since the success of the NSE, existent market and new market structures have followed the "NSE" model. NSE is also the first exchange to propose an investor grievance cell and an investor protection fund a Co-promoting and setting up of National Securities Depository Limited, first depository in India Setting up of S&P CNX Nifty. NSE pioneered commencement of Internet Trading in February 2000, which led to the wide popularization of the NSE in the broker community. Being the first exchange that, in 1996, proposed exchange traded derivatives, particularly on an equity index, in India. After four years of policy and regulatory debate and formulation, the NSE was permitted to start trading equity derivatives Being the first and the only exchange to trade GOLD ETFs (exchange traded funds) in India. NSE has also launched the NSE-CNBC-TV18 media centre in association with CNBC-TV18. NSE (National Stock Exchange) was the first exchange in the world to use satellite communication technology for trading, using a client server based system called National Exchange for Automated Trading (NEAT). For all trades entered into NEAT system, there is uniform response time of less than one second.

Trading Mechanism

Trading at both the exchanges takes place through an open electronic limit order book, in which order matching is done by the trading computer. There are no market makers or specialists and the entire process is order-driven, which means that market orders placed by investors are automatically matched with the best limit orders. As a result, buyers and sellers remain anonymous. The advantage of an order driven market is that it brings more transparency, by displaying all buy and sell orders in the trading system. However, in the absence of market makers, there is no guarantee that orders will be executed. All orders in the trading system need to be placed through brokers, many of which provide online trading facility to retail customers. Institutional investors can also take advantage of the direct market access (DMA) option, in which they use trading terminals provided by brokers for placing orders directly into the stock market trading system. Settlement Cycle and Trading Hours Equity spot markets follow a T+2 rolling settlement. This means that any trade taking place on Monday, gets settled by Wednesday. All trading on stock exchanges takes place between 9:55 am and 3:30 pm, Indian Standard Time (+ 5.5 hours GMT), Monday through Friday. Delivery of shares must be made in dematerialized form, and each exchange has its own clearing house, which assumes all settlement risk, by serving as a central counterparty.

Market Indexes The two prominent Indian market indexes are Sensex and Nifty. Sensex is the oldest market index for equities; it includes shares of 30 firms listed on the BSE, which represent about 45% of the index's free-float market capitalization. It was created in 1986 and provides time series data from April 1979, onward. Another index is the S&P CNX Nifty; it includes 50 shares listed on the NSE, which represent about 62% of its free-float market capitalization. It was created in 1996 and provides time series data from July 1990, onward. SENSEX: The index is calculated based on a free float capitalization methoda variation of the market capitalization method. Instead of using a company's outstanding shares it uses its float, or shares that are readily available for trading.

The free-float method, therefore, does not include restricted stocks, such as those held by promoters, government and strategic investors. Initially, the index was calculated based on the full market capitalization method. However this was shifted to the free float method with effect from September 1, 2003. Globally, the free float market capitalization is regarded as the industry best practice. As per free float capitalization methodology, the level of index at any point of time reflects the free float market value of 30 component stocks relative to a base period. The market capitalization of a company is determined by multiplying the price of its stock by the number of shares issued by the company. This market capitalization is multiplied by a free float factor to determine the free float market capitalization. Free float factor is also referred as adjustment factor. Free float factor represents the percentage of shares that are readily available for trading. Some of the historical replacements were:

DLF replaced Dr. Reddy's Lab on November 19, 2007. Jaiprakash Associates Ltd replaced Bajaj Auto Ltd on March 14, 2008. Sterlite Industries replaced Ambuja Cements on July 28, 2008. Tata Power Company replaced Cipla Ltd. on July 28, 2008. Sun Pharmaceutical Industries replaced Satyam Computer Services on January 8, 2009 Hero Honda Motors Ltd. replaced Ranbaxy on June 29, 2009 Cipla to replace Sun Pharma from May 3, 2010 Grasim replaced JSPL in 2010 Bajaj Auto replaced ACC from Dec 6th, 2010 Coal India replaced Reliance Infrastructure and Sun Pharmaceutical replaced Reliance Communications from Aug 8th, 2011

Market Regulation The overall responsibility of development, regulation and supervision of the stock market rests with the SEBI. SEBI is the regulatory authority established under Section 3 of SEBI Act 1992 to protect the interests of the investors in securities and to promote the development of, and to regulate, the securities market and for matters connected therewith and incidental thereto. It enjoys vast powers of imposing penalties on market participants, in case of a breach. Who Can Invest In India?

India started permitting outside investments only in the 1990s. Foreign investments are classified into two categories: foreign direct investment (FDI) and foreign portfolio investment (FPI). All investments, in which an investor takes part in the day-to-day management and operations of the company, are treated as FDI, whereas investments in shares without any control over management and operations are treated as FPI. For making portfolio investment in India, one should be registered either as a foreign institutional investor (FII) or as one of the sub-accounts of one of the registered FIIs. Both registrations are granted by the market regulator, SEBI. Foreign institutional investors mainly consist of mutual funds, pension funds, endowments, sovereign wealth funds, insurance companies, banks, asset management companies etc. At present, India does not allow foreign individuals to invest directly into its stock market. However, high-net-worth individuals (those with a net worth of at least $US50 million) can be registered as sub-accounts of an FII. Foreign institutional investors and their sub accounts can invest directly into any of the stocks listed on any of the stock exchanges. Most portfolio investments consist of investment in securities in the primary and secondary markets, including shares, debentures and warrants of companies listed or to be listed on a recognized stock exchange in India. FIIs can also invest in unlisted securities outside stock exchanges, subject to approval of the price by the Reserve Bank of India. Finally, they can invest in units of mutual funds and derivatives traded on any stock exchange. An FII registered as a debt-only FII can invest 100% of its investment into debt instruments. Other FIIs must invest a minimum of 70% of their investments in equity. The balance of 30% can be invested in debt. FIIs must use special nonresident rupee bank accounts, in order to move money in and out of India. The balances held in such an account can be fully repatriated. Restrictions/Investment Ceilings The government of India prescribes the FDI limit and different ceilings have been prescribed for different sectors. Over a period of time, the government has been progressively increasing the ceilings. FDI ceilings mostly fall in the range of 26100%. By default, the maximum limit for portfolio investment in a particular listed firm is decided by the FDI limit prescribed for the sector to which the firm belongs. However, there are two additional restrictions on portfolio investment. First, the aggregate limit of investment by all FIIs, inclusive of their sub-accounts in any particular firm, has been fixed at 24% of the paid-up capital. However, the same can

be raised up to the sector cap, with the approval of the company's boards and shareholders. Secondly, investment by any single FII in any particular firm should not exceed 10% of the paid-up capital of the company. Regulations permit a separate 10% ceiling on investment for each of the sub-accounts of an FII, in any particular firm. However, in case of foreign corporations or individuals investing as a sub-account, the same ceiling is only 5%. Regulations also impose limits for investment in equity-based derivatives trading on stock exchanges.

Investment Opportunities for Retail Foreign Investors Foreign entities and individuals can gain exposure to Indian stocks through institutional investors. Many India-focused mutual funds are becoming popular among retail investors. Investments could also be made through some of the offshore instruments, like participatory notes (PNs) and depositary receipts, such as American depositary receipts (ADRs), global depositary receipts (GDRs), and exchange traded funds (ETFs) and exchange-traded notes (ETNs). As per Indian regulations, participatory notes representing underlying Indian stocks can be issued offshore by FIIs, only to regulated entities. However, even small investors can invest in American depositary receipts representing the underlying stocks of some of the well-known Indian firms, listed on the New York Stock Exchange and Nasdaq. ADRs are denominated in dollars and subject to the regulations of the U.S. Securities and Exchange Commission (SEC). Likewise, global depositary receipts are listed on European stock exchanges. However, many promising Indian firms are not yet using ADRs or GDRs to access offshore investors. Retail investors also have the option of investing in ETFs and ETNs, based on Indian stocks. India ETFs mostly make investments in indexes made up of Indian stocks. Most of the stocks included in the index are the ones already listed on NYSE and Nasdaq. As of 2009, the two most prominent ETFs based on Indian stocks are the Wisdom-Tree India Earnings Fund (NYSE: EPI) and the PowerShares India Portfolio Fund (NYSE:PIN). The most prominent ETN is the MSCI India Index Exchange Traded Note (NYSE:INP). Both ETFs and ETNs provide good investment opportunity for outside investors.

Difference between a depository and a depository participant.

A depository is a place where the stocks of investors are held in electronic form. The depository has agents who are called depository participants (DPs). Think of it like a bank. The head office where all the technology rests and details of all accounts held is like the depository. And the DPs are the branches that cater to individuals. There are only two depositories in India- the National Securities Depository Ltd (NSDL) and the Central Depository Services Ltd (CDSL). There are over a 100 DPs. Demat refers to a dematerialized account. Just as you have to open an account with a bank if you want to save your money, make cheque payments etc, you need to open a demat account (in Depositor) for storing the shares and a trading account (in Brokerage) if you want to buy or sell these shares. You have to approach the DPs to open your demat account. Demat account is in Depository, which is a safe place since it is located in NSDL or CDSL and not in a brokerage firm, if you want to trade in shares than a brokerage firm opens a trading account to trade shares which after T+2 days is transferred to your Demat account. Nowadays, practically all trades have to be settled in dematerialised form. Although the market regulator, the Securities and Exchange Board of India (SEBI), has allowed trades of upto 500 shares to be settled in physical form, nobody wants physical shares any more. So a demat account is a must for trading and investing.

Difference between a Broker & DP

A broker is separate from a DP. A broker is a member of the stock exchange, who buys and sells shares on his behalf and on behalf of his clients. A DP will just give you an account to hold those shares. You do not have to take the same DP that your broker takes. You can choose your own. But many brokers offer special incentives in the form of lower charges for opening demat accounts with their DPs. Eligibility criteria for DP Rs 10 crore is prescribed in addition to a grant of certificate of registration by SEBI to become a DP. SEBI Depositories & Participants Regulations, 1996 prescribe a minimum net worth of Rs. 50 lakh for the applicants who are stockbrokers or nonbanking finance SEBI. If a stockbroker seeks to act as a DP in more than one depository, he should comply with the specified net worth criterion separately for each such depository. The net worth specified under Bye-Laws of NSDL has to be maintained by DPs at all times without which NSDL may suspend or terminate their operations.

Financial Markets
Various types of financial markets:
1. Money Market: Money market is a market for debt securities that pay off in the

short term usually less than one year, for example the market for 90-days treasury bills. This market encompasses the trading and issuance of short term non-equity debt instruments including treasury bills, commercial papers, bankers acceptance, certificates of deposits, etc. Common money market instruments Certificate of deposit - Time deposit, commonly offered to consumers by banks, thrift institutions, and credit unions. Repurchase agreements - Short-term loansnormally for less than two weeks and frequently for one dayarranged by selling securities to an investor with an agreement to repurchase them at a fixed price on a fixed date. Commercial paper - Unsecured promissory notes with a fixed maturity of one to 270 days; usually sold at a discount from face value.. Federal funds - Interest-bearing deposits held by banks and other depository institutions at the Federal Reserve; these are immediately available funds that institutions borrow or lend, usually on an overnight basis. They are lent for the federal funds rate.

Municipal notes - Short-term notes issued by municipalities in anticipation of tax receipts or other revenues. Treasury bills - Short-term debt obligations of a national government that are issued to mature in three to twelve months. Money funds - Pooled short maturity, high quality investments which buy money market securities on behalf of retail or institutional investors. Foreign Exchange Swaps - Exchanging a set of currencies in spot date and the reversal of the exchange of currencies at a predetermined time in the future. Short-lived mortgage- and asset-backed securities

2. Capital Market: Capital market is a market for long-term debt and equity

shares. In this market, the capital funds comprising of both equity and debt are issued and traded. This also includes private placement sources of debt and equity as well as organized markets like stock exchanges. Capital market can be further divided into primary and secondary markets. Knowing the functions of the primary and secondary markets are keys to understanding how stocks trade. Without them, the stock market would be much harder to navigate and much less profitable. 1) Primary Market The primary market is where securities are created. It's in this market that firms sell (float) new stocks and bonds to the public for the first time. For our purposes, you can think of the primary market as being synonymous with an initial public offering (IPO). Simply put, an IPO occurs when a private company sells stocks to the public for the first time. Methods of issuing securities in the primary market are: a. Initial public offering; b. Rights issue (for existing companies); c. Preferential issue. a) IPOs can be very complicated because many different rules and regulations dictate the processes of institutions, but they all follow a general pattern: 1. A company contacts an underwriting firm to determine the legal and financial details of the public offering. 2. A preliminary registration statement, detailing the company's interests and prospects and the specifics of the issue, is filed with the appropriate authorities. Known as a preliminary prospectus, or red herring, this document is neither finalized nor is it a solicitation by the company issuing the new shares. It is simply an information pamphlet and a letter describing the company's intent.

3. The appropriate governing bodies must approve the finalized statement as well as a final prospectus, which details the issue's price, restrictions and benefits and is issued to those who purchase the securities. This final prospectus is legally binding for the company. b) Rights issue: A right issue is an issue of additional shares by a company to raise seasoned equity offering. The rights issue is a special form of shelf offering or shelf registration. With the issued rights, existing shareholders have the privilege to buy a specified number of new shares from the firm at a specified price within a specified time. A rights issue is in contrast to an initial public offering, where shares are issued to the general public through market exchanges. Closed-end companies cannot retain earnings, because they distribute essentially all of their realized income, and capital gains each year. They raise additional capital by rights offerings. Companies usually opt for a rights issue either when having problems raising capital through traditional means or to avoid interest charges on loans. c) Preferential shares, or simply preferred, is a special equity security that has properties of both equity and a debt instrument and is generally considered a hybrid instrument. Preferred are senior (i.e. higher ranking) to common stock, but are subordinate to bonds in terms of claim or rights to their share of the assets of the company. Preferred stock usually carries no voting rights, but may carry a dividend and may have priority over common stock in the payment of dividends and upon liquidation. Terms of the preferred stock are stated in a "Certificate of Designation". The important thing to understand about the primary market is that securities are purchased directly from an issuing company.

2) Secondary Market The secondary market is what people are talking about when they refer to the "stock market". This includes the Bombay Stock exchange (BSE) and all major exchanges around the world. The defining characteristic of the secondary market is that investors trade amongst themselves. That is, in the secondary market, investors trade previously-issued securities without the involvement of the issuing companies. For example, if you go to buy Microsoft stock, you are dealing only with another investor who owns shares in Microsoft. Microsoft (the company) is in no way involved with the transaction. The secondary market can be further broken down into two specialized categories: auction market and dealer market.

1. In the auction market, all individuals and institutions that want to trade

securities will congregate in one area and announce the prices at which they are willing to buy and sell. These are referred to as bid and ask prices. The idea is that an efficient market should prevail by bringing together all parties and having them publicly declares their prices. Thus, theoretically, the best price of a good need not be sought out because the convergence of buyers and sellers will cause mutually-agreeable prices to emerge. The best example of an auction market is the NYSE.
2. In contrast, a dealer market does not require parties to converge in a central

location. Rather, participants in the market are joined through electronic networks (from low-tech telephones or fax to complicated order-matching systems). The dealers hold an inventory of the security in which they "make a market". The dealers then stand ready to buy or sell with market participants. These dealers earn profits through the spread between the prices at which they buy and sell securities. An example of a dealer market is the Nasdaq, in which the dealers, who are known as market makers, provide firm bid and ask prices at which they are willing to buy and sell a security. The theory is that competition between dealers will provide the best possible price for investors. 3. The OTC Market Sometimes you'll hear a dealer market referred to as an over-the-counter (OTC) market. The term originally meant a relatively unorganized system where trading did not occur at a physical place, as we described above, but rather through dealer networks. The term was most likely derived from the off-Wall Street trading that boomed during the great bull market of the 1920s, in which shares were sold "overthe-counter" in stock shops. In other words, the stocks were not listed on a stock exchange - they were "unlisted". Over time, however, the meaning of OTC began to change. The Nasdaq was created in 1971 by the National Association of Securities Dealers (NASD) to bring liquidity to the companies that were trading through dealer networks. At the time, there were few regulations placed on shares trading over-the-counter - something the NASD sought to improve. As the Nasdaq has evolved over time to become a major exchange, the meaning of over-the-counter has become fuzzier. Today, the Nasdaq is still considered a dealer market and, technically, an OTC. However, today's Nasdaq is a stock exchange and, therefore, it is inaccurate to say that it trades in unlisted securities. Nowadays, the term "over-the-counter" refers to stocks that are not trading on a stock exchange such as the Nasdaq, NYSE or American Stock Exchange

(AMEX). This generally means that the stock trades either on the over-the-counter bulletin board (OTCBB) or the pink sheets. Neither of these networks is an exchange, in fact, they describe themselves as providers of pricing information for securities. OTCBB and pink sheet companies have far fewer regulations to comply with than those that trade shares on a stock exchange. Most securities that trade this way are penny stocks or are from very small companies. (To learn more, see Getting To Know Stock Exchanges.) 4. Third and Fourth Markets You might also hear the terms "third" and "fourth markets". These don't concern individual investors because they involve significant volumes of shares to be transacted per trade. These markets deal with transactions between broker-dealers and large institutions through over-the-counter electronic networks. The third market comprises OTC transactions between broker-dealers and large institutions. The fourth market is made up of transactions that take place between large institutions. The main reason these third and fourth market transactions occur is to avoid placing these orders through the main exchange, which could greatly affect the price of the security. Because access to the third and fourth markets is limited, their activities have little effect on the average investor.

Financial products

Financial products refer to instruments that help you save, invest, get insurance or get a mortgage. These are issued by various banks, financial institutions, stock brokerages, insurance providers, credit card agencies and government sponsored entities. Financial products are categorized in terms of their type or underlying asset class, volatility, risk and return. Types of financial products

Shares: These represent ownership of a company. While shares are initially

issued by corporations to finance their business needs, they are subsequently bought and sold by individuals in the share market. They are associated with high risk and high returns. Returns on shares can be in the form of dividend payouts by the company or profits on the sale of shares in the stock market. Shares, stocks, equities and securities are words that are generally used interchangeably.

Bonds: These are issued by companies to finance their business operations and
by governments to fund budget expenses like infrastructure and social programs. Bonds have a fixed interest rate, making the risk associated with them lower than that with shares. The principal or face value of bonds is recovered at the time of maturity.

Treasury Bills: These are instruments issued by the government for financing
its short term needs. They are issued at a discount to the face value. The profit earned by the investor is the difference between the face or maturity value and the price at which the Treasury Bill was issued.

Certificate of Deposit: Certificates of deposit (or CDs) are issued by banks,

thrift institutions and credit unions. They usually have a fixed term and fixed interest rate.

Annuities: These are contracts between individual investors and insurance

companies, where investors agree to pay an allocated amount of premium and at the end of a pre-determined fixed term, the insurer will guarantee a series of payments to the insured party.

Mutual Funds: These are professionally managed financial instruments that

involve the diversification of investment into a number of financial products, such as shares, bonds and government securities. This helps to reduce an investors risk exposure, while increasing the profit potential.

Types of Mutual Funds Schemes in India

Wide variety of Mutual Fund Schemes exists to cater to the needs such as financial position, risk tolerance and return expectations etc. thus mutual funds has Variety of flavors, Being a collection of many stocks, an investors can go for picking a mutual fund might be easy. There are over hundreds of mutual funds scheme to choose from. It is easier to think of mutual funds in categories, mentioned below. Overview of existing schemes existed in mutual fund category: BY STRUCTURE 1. Open - Ended Schemes: An open-end fund is one that is available for subscription all through the year. These do not have a fixed maturity. Investors can conveniently buy and sell units at Net Asset Value ("NAV") related prices. The key feature of open-end schemes is liquidity. 2. Close - Ended Schemes: These schemes have a pre-specified maturity period. One can invest directly in the scheme at the time of the initial issue. Depending on the structure of the scheme there are two exit options available to an investor after the initial offer period closes. Investors can transact (buy or sell) the units of the scheme on the stock exchanges where they are listed. The market price at the stock exchanges could vary from the net asset value (NAV) of the scheme on account of demand and supply situation, expectations of unit holder and other market factors. Alternatively some close-ended schemes provide an additional option of selling the units directly to the Mutual Fund through periodic repurchase at the schemes NAV; however one cannot buy units and can only sell units during the liquidity window. SEBI Regulations ensure that at least one of the two exit routes is provided to the investor. 3. Interval Schemes: Interval Schemes are that scheme, which combines the features of open-ended and close-ended schemes. The units may be traded on the stock exchange or may be open for sale or redemption during pre-determined intervals at NAV related prices.

Each fund has a predetermined investment objective that tailors the fund's assets, regions of investments and investment strategies. At the fundamental level, there are three varieties of mutual funds: BY NATURE 1) Equity funds (stocks) 2) Fixed-income funds (bonds)

3) Money market funds All mutual funds are variations of these three asset classes. For example, while equity funds that invest in fast-growing companies are known as growth funds, equity funds that invest only in companies of the same sector or region are known as specialty funds. We'll start with the safest and then work through to the more risky. Money Market Funds The money market consists of short-term debt instruments, mostly Treasury bills. This is a safe place to park your money. You won't get great returns, but you won't have to worry about losing your principal. A typical return is twice the amount you would earn in a regular checking/savings account and a little less than the average certificate of deposit (CD). Bond/Income Funds Income funds are named appropriately: their purpose is to provide current income on a steady basis. When referring to mutual funds, the terms "fixed-income," "bond," and "income" are synonymous. These terms denote funds that invest primarily in government and corporate debt. While fund holdings may appreciate in value, the primary objective of these funds is to provide a steady cashflow to investors. As such, the audience for these funds consists of conservative investors and retirees. (Learn more in Income Funds 101.) Bond funds are likely to pay higher returns than certificates of deposit and money market investments, but bond funds aren't without risk. Because there are many different types of bonds, bond funds can vary dramatically depending on where they invest. For example, a fund specializing in high-yield junk bonds is much more risky than a fund that invests in government securities. Furthermore, nearly all bond funds are subject to interest rate risk, which means that if rates go up the value of the fund goes down. Balanced Funds The objective of these funds is to provide a balanced mixture of safety, income and capital appreciation. The strategy of balanced funds is to invest in a combination of fixed income and equities. A typical balanced fund might have a weighting of 60% equity and 40% fixed income. The weighting might also be restricted to a specified maximum or minimum for each asset class.

A similar type of fund is known as an asset allocation fund. Objectives are similar to those of a balanced fund, but these kinds of funds typically do not have to hold a specified percentage of any asset class. The portfolio manager is therefore given freedom to switch the ratio of asset classes as the economy moves through the business cycle. Equity Funds Funds that invest in stocks represent the largest category of mutual funds. Generally, the investment objective of this class of funds is long-term capital growth with some income. There are, however, many different types of equity funds because there are many different types of equities. A great way to understand the universe of equity funds is to use a style box, an example of which is:-

The idea is to classify funds based on both the size of the companies invested in and the investment style of the manager. The term value refers to a style of investing that looks for high quality companies that are out of favor with the market. These companies are characterized by low P/E and price-tobook ratios and high dividend yields. The opposite of value is growth, which refers to companies that have had (and are expected to continue to have) strong growth in earnings, sales and cash flow. A compromise between value and growth is blend, which simply refers to companies that are neither value nor growth stocks and are classified as being somewhere in the middle. For example, a mutual fund that invests in large-cap companies that are in strong financial shape but have recently seen their share prices fall would be placed in the upper left quadrant of the style box (large and value). The opposite of this would be a fund that invests in startup technology companies with excellent growth prospects. Such a mutual fund would reside in the bottom right quadrant (small and growth). (For further reading, check out Understanding the Mutual Fund Style Box.) Global/International Funds An international fund (or foreign fund) invests only outside your home country. Global funds invest anywhere around the world, including your home country.

It's tough to classify these funds as either riskier or safer than domestic investments. They do tend to be more volatile and have unique country and/or political risks. But, on the flip side, they can, as part of a well-balanced portfolio, actually reduce risk by increasing diversification. Although the world's economies are becoming more interrelated, it is likely that another economy somewhere is outperforming the economy of your home country. Specialty Funds This classification of mutual funds is more of an all-encompassing category that consists of funds that have proved to be popular but don't necessarily belong to the categories we've described so far. This type of mutual fund forgoes broad diversification to concentrate on a certain segment of the economy. Sector funds are targeted at specific sectors of the economy such as financial, technology, health, etc. Sector funds are extremely volatile. There is a greater possibility of big gains, but you have to accept that your sector may tank. Regional funds make it easier to focus on a specific area of the world. This may mean focusing on a region (say Latin America) or an individual country (for example, only Brazil). An advantage of these funds is that they make it easier to buy stock in foreign countries, which is otherwise difficult and expensive. Just like for sector funds, you have to accept the high risk of loss, which occurs if the region goes into a bad recession. Socially-responsible funds (or ethical funds) invest only in companies that meet the criteria of certain guidelines or beliefs. Most socially responsible funds don't invest in industries such as tobacco, alcoholic beverages, weapons or nuclear power. The idea is to get a competitive performance while still maintaining a healthy conscience. Index Funds The last but certainly not the least important are index funds. This type of mutual fund replicates the performance of a broad market index such as the S&P 500 or Dow Jones Industrial Average (DJIA). An investor in an index fund figures that most managers can't beat the market. An index fund merely replicates the market return and benefits investors in the form of low fees. (For more on index funds, check out our Index Investing Tutorial.)

Derivative products:

Futures: A financial contract obligating the buyer to purchase an asset (or the
seller to sell an asset), such as a physical commodity or a financial instrument, at a predetermined future date and price. Futures contracts detail the quality and quantity of the underlying asset; they are standardized to facilitate trading on a futures exchange. Some futures contracts may call for physical delivery of the asset, while others are settled in cash. The futures markets are characterized by the ability to use very high leverage relative to stock markets. Futures can be used either to hedge or to speculate on the price movement of the underlying asset. For example, a producer of corn could use futures to lock in a certain price and reduce risk (hedge). On the other hand, anybody could speculate on the price movement of corn by going long or short using futures.

Options: are rights to buy and sell shares. An option holder does not actually
purchase shares. Instead, he purchases the rights on the shares. There are two types of options. Calls (option to BUY any security at a particular date at a particular price) and puts (option to SELL any security at a particular date at a particular price). Options are classified as American (which can be exercised before the settlement date) and European (which can be exercised only on the settlement date).

An exercise is a process by which an option buyer can square off his existing position. This is generally done when the buyer is in the profit and the options are Inthe-Money. In other words, writers of an American option bear an additional risk of the options getting exercised by the BUYer. An option premium depends on various factors: - takes note of strike price, time to expiry, implied volatility or the expected volatility of the options and interest rates. Also, an option value is the sum of intrinsic value of the option and the time value.
Price of the Security: Price (premium) of a call option has a direct relation with

the price of the security while the put option has inverse relation
Strike Price: Strike prices are classified as three types viz: In-the-Money (ITM),

Out of-the- Money (OTM) and At-the-money (ATM). As the option gets In-theMoney, it tends to get costlier. A deep ITM option has a high intrinsic value but negligible time value. In case of an OTM option, it contains only time value.
Implied Volatility (IV): An option premium is directly proportional to the IV. The

implied volatility is generally higher for the ATM options as these options have the highest sensitivity to the stock price while it tapers down for the OTM and ITM.

 Time to expiry (T): Longer the expiry, higher would be the option premium. Interest rates (I): Interest rates and option price are positively correlated on

account of the leverage factor.

Complex Financial Products

There are certain financial products that are highly complex in nature. Among these are: 1. Credit Default Swaps (CDS): Credit default swaps are highly leveraged contracts that are privately negotiated between two parties. These swaps insure against losses on securities in case of a default. Since the government does not regulate CDS related activities, there is no specific central reporting mechanism that determines the value of these contracts. 2. Collateralized Debt Obligations (CDO): These are securities that are created by collateralizing various similar debt obligations such as bonds and loans. CDOs can be bought and sold. The buyer gains the right to a part of the debt pools principal and interest income. CDS and CDO products played a major role in the financial crisis of 2008. During these troubled times, CDO ratings reflected incorrect information on the credit worth of borrowers, concealing the underlying risk in mortgage investments. Meanwhile, the size of the CDS market far exceeded that of the mortgage market in mid-2007. Thus, when the defaults began to unfold during the financial crisis, banks were not in a position to bear the losses. One of the most significant factors to consider when choosing financial products is your risk appetite. Risky investments are usually associated with higher returns than safer investments. According to empirical data, shares usually outperform all other investments over the long term. However, in the short term, shares can be extremely risky due to their random and volatile nature.

Involved Risk

The risk return trade-off indicates that if investor is willing to take higher risk then correspondingly he can expect higher returns and vice versa if he pertains to lower risk instruments, which would be satisfied by lower returns. For example, if an investors opt for bank FD, which provide moderate return with minimal risk. But as he moves ahead to invest in capital protected funds and the profit-bonds that give out more return which is slightly higher as compared to the bank deposits but the risk involved also increases in the same proportion. Thus investors choose mutual funds as their primary means of investing, as Mutual funds provide professional management, diversification, convenience and liquidity. That doesnt mean mutual fund investments risk free. This is because the money that is pooled in are not invested only in debts funds which are less riskier but are also invested in the stock markets which involves a higher risk but can expect higher returns. Hedge fund involves a very high risk since it is mostly traded in the derivatives market which is considered very volatile. No matter what type of investor you are, there is bound to be a mutual fund that fits your style. According to the last count there are more than 10,000 mutual funds in North America! That means there are more mutual funds than stocks. It's important

to understand that each mutual fund has different risks and rewards. In general, the higher the potential return, the higher the risk of loss. Although some funds are less risky than others, all funds have some level of risk - it's never possible to diversify away all risk. This is a fact for all investments.

Analysis Tools

The methods used to analyze securities and make investment decisions fall into two very broad categories: fundamental analysis and technical analysis. Fundamental analysis involves analyzing the characteristics of a company in order to estimate its value; it looks at economic factors, known as fundamentals. Technical analysis takes a completely different approach; it doesn't care one bit about the "value" of a company or a commodity. Technicians (sometimes called chartists) are only interested in the price movements in the market. Technical analysis looks at the price movement of a security and uses this data to predict its future price movements, Despite all the fancy and exotic tools it employs, technical analysis really just studies supply and demand in a market in an attempt to determine what direction, or trend, will continue in the future. In other words, technical analysis attempts to understand the emotions in the market by studying the market itself, as opposed to its components. If you understand the benefits and limitations of technical analysis, it can give you a new set of tools or skills that will enable you to be a better trader or investor. The field of technical analysis is based on three assumptions:
1) The market discounts everything.

2) Price moves in trends.

3) History tends to repeat itself.

1. The Market Discounts everything A major criticism of technical analysis is that it only considers price movement, ignoring the fundamental factors of the company. However, technical analysis assumes that, at any given time, a stock's price reflects everything that has or could affect the company - including fundamental factors. Technical analysts believe that the company's fundamentals, along with broader economic factors and market psychology, are all priced into the stock, removing the need to actually consider these factors separately. This only leaves the analysis of price movement, which technical theory views as a product of the supply and demand for a particular stock in the market. 2. Price Moves in Trends In technical analysis, price movements are believed to follow trends. This means that after a trend has been established, the future price movement is more likely to be in the same direction as the trend than to be against it. Most technical trading strategies are based on this assumption.

3. History Tends To Repeat Itself Another important idea in technical analysis is that history tends to repeat itself, mainly in terms of price movement. The repetitive nature of price movements is attributed to market psychology; in other words, market participants tend to provide a consistent reaction to similar market stimuli over time. Technical analysis uses chart patterns to analyze market movements and understand trends. Although many of these charts have been used for more than 100 years, they are still believed to be relevant because they illustrate patterns in price movements that often repeat themselves. Not Just for Stocks: Technical analysis can be used on any security with historical trading data. This includes stocks, futures and commodities, fixed-income securities, forex, etc. The Differences between technical and financial analysis
1) Charts vs. Financial Statements

At the most basic level, a technical analyst approaches a security from the charts, while a fundamental analyst starts with the financial statements. By looking at the balance sheet, cash flow statement and income statement, a fundamental analyst tries to determine a company's value. In financial terms, an analyst attempts to measure a company's intrinsic value. In this approach, investment decisions are fairly easy to make - if the price of a stock trades below its intrinsic value, it's a good investment. Although this is an oversimplification (fundamental analysis goes beyond just the financial statements) for the purposes of this tutorial, this simple tenet holds true. Technical traders, on the other hand, believe there is no reason to analyze a company's fundamentals because these are all accounted for in the stock's price. Technicians believe that all the information they need about a stock can be found in its charts.

2) Time Horizon

Fundamental analysis takes a relatively long-term approach to analyzing the market compared to technical analysis. While technical analysis can be used on a timeframe of weeks, days or even minutes, fundamental analysis often looks at

data over a number of years. The different timeframes that these two approaches use is a result of the nature of the investing style to which they each adhere. It can take a long time for a company's value to be reflected in the market, so when a fundamental analyst estimates intrinsic value, a gain is not realized until the stock's market price rises to its "correct" value. This type of investing is called value investing and assumes that the short-term market is wrong, but that the price of a particular stock will correct itself over the long run. This "long run" can represent a timeframe of as long as several years, in some cases. Furthermore, the numbers that a fundamentalist analyzes are only released over long periods of time. Financial statements are filed quarterly and changes in earnings per share don't emerge on a daily basis like price and volume information. Also remember that fundamentals are the actual characteristics of a business. New management can't implement sweeping changes overnight and it takes time to create new products, marketing campaigns, supply chains, etc. Part of the reason that fundamental analysts use a long-term timeframe, therefore, is because the data they use to analyze a stock is generated much more slowly than the price and volume data used by technical analysts.

3) Trading Versus Investing

Not only is technical analysis more short term in nature than fundamental analysis, but the goals of a purchase (or sale) of a stock are usually different for each approach. In general, technical analysis is used for a trade, whereas fundamental analysis is used to make an investment. Investors buy assets they believe can increase in value, while traders buy assets they believe they can sell to somebody else at a greater price. The line between a trade and an investment can be blurry, but it does characterize a difference between the two schools. The Critics Some critics see technical analysis as a form of black magic. Don't be surprised to see them question the validity of the discipline to the point where they mock its supporters. In fact, technical analysis has only recently begun to enjoy some mainstream credibility. While most analysts on Wall Street focus on the fundamental side, just about any major brokerage now employs technical analysts as well. Much of the criticism of technical analysis has its roots in academic theory -

specifically the efficient market hypothesis (EMH). This theory says that the market's price is always the correct one - any past trading information is already reflected in the price of the stock and, therefore, any analysis to find undervalued securities is useless. There are three versions of EMH. In the first, called weak form efficiency, all past price information is already included in the current price. According to weak form efficiency, technical analysis can't predict future movements because all past information has already been accounted for and, therefore, analyzing the stocks past price movements will provide no insight into its future movements. In the second, semi-strong form efficiency, fundamental analysis is also claimed to be of little use in finding investment opportunities. The third is strong form efficiency, which states that all information in the market is accounted for in a stock's price and neither technical nor fundamental analysis can provide investors with an edge. The vast majority of academics believe in at least the weak version of EMH, therefore, from their point of view, if technical analysis works, market efficiency will be called into question. There is no right answer as to who is correct. There are arguments to be made on both sides and, therefore, it's up to you to do the homework and determine your own philosophy. Can They Co-Exist? Although technical analysis and fundamental analysis are seen by many as polar opposites - the oil and water of investing - many market participants have experienced great success by combining the two. For example, some fundamental analysts use technical analysis techniques to figure out the best time to enter into an undervalued security. Oftentimes, this situation occurs when the security is severely oversold. By timing entry into a security, the gains on the investment can be greatly improved. Alternatively, some technical traders might look at fundamentals to add strength to a technical signal. For example, if a sell signal is given through technical patterns and indicators, a technical trader might look to reaffirm his or her decision by looking at some key fundamental data. Oftentimes, having both the fundamentals and technical on your side can provide the best-case scenario for a trade. While mixing some of the components of technical and fundamental analysis is not well received by the most devoted groups in each school, there are certainly benefits to at least understanding both schools of thought.