37711902 project-on-online-trading-at-sharekhan-ltd

“A STUDY ON ONLINE TRADING” in SHAREKHAN
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A SUMMER INTERNSHIP PROJECT ON

“A STUDY ON ONLINE TRADING”

FOR THE PARTIAL FULFILLMENT OF POST-GRADUATION DEGREE IN
“MASTER OF BUSINESS ADMINSTRATION”

INTERNSHIP DONE AT
“SHAREKHAN LIMITED”

UNDER THE ESTEEMED GUIDENCE OF
PROF. RAVI KUMAR
(FACULTY, AGBS HYDERABAD)

SUBMITTED BY
MITHUN KUMAR PATNAIK
ROLL NO: A30601909082

AMITY GLOBAL BUSINESS SCHOOL
BANJARA HILLS ROAD NO: 11
ADJACENT TO LAKE VEIW APARTMENT
HYDERABAD
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AMITY GLOBAL BUSINESS SCHOOL, HYDERABAD

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DECLARATION

I hereby declare to the best of my knowledge and belief that the Summer
Training Project Report entitled as “STUDY ON ONLINE TRADING”
for SHAREKHAN LIMITED HYDERABAD being submitted as the
partial fulfilment of Master of Business Administration, has been written
and submitted under the guidance of Mr. Shayam Sundar and Mr
K.P.Singh Industry guides and Mr Ravi Kumar my faculty guide.
I further declare that it is original work done as a part of the academic
course and has not been submitted elsewhere.
The conclusions and recommendations written in this project are based on
the data collected by me while preparing this report.

A30601909082

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certificate
(whom so ever it may concern)

This is to certify that the project report entitled “A STUDY ON
ONLINE TARDING” carried at SHAREKHAN LIMITED Hyderabad is
a bonafide work done by Mr. MITHUN KUMAR PATNAIK, bearing ID
No. A30601909082 a student of AMITY GLOBAL BUSINESS
SCHOOL, Hyderabad and submitted the same in the partial fulfilment
for the award of the degree of “ MASTER OF BUSINESS
ADMINISTRATION” has done his Summer Internship Program
under my guidance from 1st June 2010 to 15th July 2010.
I found him to be good in the task and activities assigned to
him. I wish his success in all future endeavours.

(FACULTY GUIDE) (INDUSTRY GUIDE)

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ACKNOWLEDGEMENT

I would like to express word of thanks to all those who have provided me with
sincere advice and information during the course of my training period. It was
indeed a great pleasure for me to work in a very co-operative, enthusiastic and
learning atmosphere at ShareKhan Limited.
I would like to take this opportunity to thank Dr. Prasad Rao (Director AGBS

Business School for giving me an opportunity for doing a project in a corporate
Hyderabad) and D.Surekha Thakur (corporate relations), Amity Global

firm and all my faculty members, senior officials and colleagues at Share Khan
for their help and support during the project.
I would also like to express my sincere thanks to prof. Ravi Kumar (Faculty
Guide-AMITY GLOBAL BUSINESS SCHOOL, Hyderabad) for his unstinting
guidance and support throughout the project. He has been a great source of
motivation to me.
I would also like to extend my regards to my company guides Mr.K.P.Singh
Territory Manager, Share Khan and Mr.Shyam Sundar, Marketing Manager,
Share khan and for helping me and providing me with right direction during the
course of my project. The interaction with him has provided me with the
knowledge which will definitely help me to enrich my career and help me to
perform better in future.
With all the heartiest thanks; I hope my final project report will be a great
success and a good source of learning and information.

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INDEX
CHAPTER PARTICULARS PAGE NUMBER
CHAPTER -1 OBJECTIVES AND 1
METHODOLOGY
OF STUDY
CHAPTER-2 INDUSTRY 3
ANALYSIS
CHAPTER-3 ELECTRONIC 16
SETTLEMENT OF
TRADE
CHAPTER-4 DEFINATIONS AND 28
EXPLANATIONS
CHAPTER-5 OUTCRY SYSTEM 37
AND ONLINE
TRADING SYSTEM
CHAPTER-6 COMPANY 59
PROFILE
CHAPTER-7 ONLINE TRADING 66
AT SHAREKHAN
CHAPTER-8 COMPARITIVE 82
ANALYSIS
CHAPTER-9 QUESTIONNAIRES 93
AND ANALYSIS
CHAPTER-10 CASE STUDY 114
CHAPTER-11 ARTICLE 119
CHAPTER-12 PROJECT 122
ANALYSIS
CHAPTER-13 BIBILIOGRAPHY 127
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EXECUTIVE SUMMARY

As per the title suggest the project report has been prepared regarding the growth and
development of online trading in India. Online trading was initiated by NSE in India
and soon after the other exchanges also followed it. There was a major boom in yr.
2000 when lots of online trading companies came with a bang but only few were
survived because of lack of computer knowledge and low internet penetration. There
are two types of online trading companies one is the banking online trading
companies and the other is non-banking trading. A few examples of banking online
trading companies are HDFC securities, ICICI direct.com, UTI securities etc. On the
other hand non banking trading companies are sharekhan.com, Angel Broking,
Reliance Money etc. Today online trading contributes are about 8-10%. It is
continuously growing and has a huge market potential. A study was undertaken to
determine the growth of various online trading companies in India in terms of trade
done by them through online and services provided by them.

Major findings indicates that out of a survey of 50 respondents it was seen that major
investors prefer online trading because of few major factors such as time saving
convenience, protection through Freudian brokers etc. although during my research
project I’ve seen that most of the respondents feel online trading, a secure way of
investing into stock market still a few of them feel it unsafe and a bit complicated but
they posses information about online trading. Today the online trading companies
having cut-throat competition in our offering whose brokerage discounts lower
margin money and zero balance account. Due to the rising education awareness and
use of internet there is a huge potential for online trading in future and companies
must come up with innovative offerings to capture the untapped market.
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CHAPTER I
OBJECTIVES AND METHODOLOGY OF
STUDY

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CHAPTER-1

OBJECTIVES OF THE STUDY:

It is to analyze the changes in trading after the exchange shifted from

outcry to online trading system.

It is to study the functions of SHAREKHAN through various

departments.

To know the online screen based trading system adopted by

SHAREKHAN and about its communication facilities. The appropriate

configuration to set the network, which would link the SHAREKHAN to

individual / members.

To know about the latest and future development in the stock

exchange trading system.

METHODOLOGY OF THE STUDY:

The data collection methods include both primary and secondary collection
methods.

Primary method: This method includes the data collected from the personal
interaction with authorized members of Share khan Securities limited.

Secondary method: The secondary data collection method includes:
The lecturers delivered by the superintendents of respective departments. The
brochures and material provided by Sharekhan Securities limited and Data
collected through distribution of questionnaires from a sample. The data
collected from the magazines of the NSE, economic times, and etc., various
books relating to the investments, capital market and other related topics.
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NEED FOR THE STUDY:

The present study to review the online trading procedure a case study of ONLINE

TRADING at SHAREKHAN., as the exchange has changed it’s trading from the

outcry mode to online trading on 20th February 1997, there is need to assess the

performance of the capital market.

LIMITATIONS OF THE STUDY:

The study is confined to online trading procedure only. Problems of listing are

not covered due to limited time and to keep the study in manageable limits.

SAMPLE SIZE:
Questionnaire 1: sample size 30
Questionnaire 2: sample size 50

TIME LINE: Project started on 1st June 2010 and concluded on 15th July 2010.

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CHAPTER 2

INDUSTRY ANALYSIS
FINANCIAL SYSTEM
DIFFERENT TYPES OF MARKETS
STOCK EXCHANGES
SEBI FRAMEWORK

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CHAPTER-2

Following diagram gives the structure of Indian financial system:

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FINANCIAL MARKET:

Financial markets are helpful to provide liquidity in the system and for
smooth functioning of the system. These markets are the centers that provide
facilities for buying and selling of financial claims and services. The financial
markets match the demands of investment with the supply of capital from
various sources.

According to functional basis financial markets are classified into two types.
They are:
 Money markets (short-term)
 Capital markets (long-term)
According to institutional basis again classified in to two types. They are
 Organized financial market
 Non-organized financial market.

The organized market comprises of official market represented by recognized
institutions, bank and government (SEBI) registered/controlled activities and
intermediaries. The unorganized market is composed of indigenous bankers,
moneylenders, individual professional and non-professionals.

MONEY MARKET:

Money market is a place where we can raise short-term capital.
Again the money market is classified in to
 Inter bank call money market
 Bill market and
 Bank loan market Etc.
 E.g.; treasury bills, commercial papers, CD's etc.
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CAPITAL MARKET:

The capital market is the market for securities, where companies and the
government can raise long term funds. The capital market includes the stock market
and the bond market. Financial regulators ensure that investors are protected
against fraud. The capital markets consist of the primary market, where new issues
are distributed to investors, and the secondary market, where existing securities are
traded.
Capital market thus plays a vital role in channelizing the savings of individuals for
Investment in the economic development of the country. As a result the investors
are not constrained by their individual abilities, but by the abilities of the
companies, which in turn enhance the savings and investments in the country,
liquidity of capital market is an important factor affecting growth.
Since projects require long term finance, but on the other hand, the investor may
not like to relinquish control over their savings for a long time. A liquid stock market
ensures a quick exit without incurring heavy losses or costs. Thus development of
efficient market system is necessary for creating conductive climate for investment
and economic growth.

Capital market is a place where we can raise long-term capital.
Again the capital market is classified in to two types and they are
 Primary market and
 Secondary market.
E.g.: Shares, Debentures, and Loans etc.
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PRIMARY MARKET:

Primary market is generally referred to the market of new issues or market
for mobilization of resources by the companies and government undertakings,
for new projects as also for expansion, modernization, addition, and
diversification and up gradation. Primary market is also referred to as New Issue
Market. Primary market operations include new issues of shares by new and
existing companies, further and right issues to existing shareholders, public
offers, and issue of debt instruments such as debentures, bonds, etc.
The primary market is regulated by the Securities and Exchange Board of India
(SEBI a government regulated authority).
Function:
The main services of the primary market are origination, underwriting, and
distribution. Origination deals with the origin of the new issue. Underwriting
contract make the shares predictable and remove the element of uncertainty in
the subscription. Distribution refers to the sale of securities to the investors.
The following are the market intermediaries associated with the market:
1. Merchant banker/book building lead manager
2. Registrar and transfer agent
3. Underwriter/broker to the issue
4. Adviser to the issue
5. Banker to the issue
6. Depository
7. Depository participant

Investors’ protection in the primary market:

To ensure healthy growth of primary market, the investing public should be
protected. The term investor protection has a wider meaning in the primary
market. The principal ingredients of investors’ protection are:
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 Provision of all the relevant information
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 Provision of accurate information and
 Transparent allotment procedures without any bias.

SECONDARY MARKET

The primary market deals with the new issues of securities. Outstanding
securities are traded in the secondary market, which is commonly known as
stock market or stock exchange. “The secondary market is a market where scrip’s
are traded”. It is a market place which provides liquidity to the scrip’s issued in
the primary market. Thus, the growth of secondary market depends on the
primary market. More the number of companies entering the primary market,
the greater are the volume of trade at the secondary market. Trading activities in
the secondary market are done through the recognized stock exchanges which
are 23 in number including Over the Counter Exchange of India (OTCE), National
Stock Exchange of India and Interconnected Stock Exchange of India.

Secondary market operations involve buying and selling of securities on the
stock exchange through its members. The companies hitting the primary market
are mandatory to list their shares on one or more stock exchanges in India.
Listing of scrip’s provides liquidity and offers an opportunity to the investors to
buy or sell the scrip’s.

The following are the intermediaries in the secondary market:
1. Broker/member of stock exchange – buyers broker and sellers broker
2. Portfolio Manager
3. Investment advisor
4. Share transfer agent
5. Depository
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6. Depository participants.
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STOCK MARKETS IN INDIA:

Stock exchanges are the perfect type of market for securities whether of
government and semi-govt bodies or other public bodies as also for shares and
debentures issued by the joint-stock companies. In the stock market, purchases
and sales of shares are affected in conditions of free competition. Government
securities are traded outside the trading ring in the form of over the counter
sales or purchase. The bargains that are struck in the trading ring by the
members of the stock exchanges are at the fairest prices determined by the basic
laws of supply and demand.

Definition of a stock exchange:

“Stock exchange means any body or individuals whether incorporated or not,
constituted for the purpose of assisting, regulating or controlling the business of
buying, selling or dealing in securities.” The securities include:

 Shares of public company.
 Government securities.
 Bonds

History of Stock Exchanges:

The only stock exchanges operating in the 19th century were those of
Mumbai setup in 1875 and Ahmadabad set up in 1894. These were organized as
voluntary non-profit-marking associations of brokers to regulate and protect
their interests. Before the control on securities under the constitution in 1950, it
was a state subject and the Bombay securities contracts (control) act of 1925
used to regulate trading in securities. Under this act, the Mumbai stock exchange
was recognized in 1927 and Ahmadabad in 1937. During the war boom, a
number of stock exchanges were organized. Soon after it became a central
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subject, central legislation was proposed and a committee headed by
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A.D.Gorwala went into the bill for securities regulation. On the basis of the


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committee’s recommendations and public discussion, the securities contract
(regulation) act became law in 1956.

Functions of Stock Exchanges:

Stock exchanges provide liquidity to the listed companies. By giving
quotations to the listed companies, they help trading and raise funds from the
market. Over the hundred and twenty years during which the stock exchanges
have existed in this country and through their medium, the central and state
government have raised crores of rupees by floating public loans. Municipal
corporations, trust and local bodies have obtained from the public their financial
requirements, and industry, trade and commerce- the backbone of the country’s
economy-have secured capital of crores or rupees through the issue of stocks,
shares and debentures for financing their day-to-day activities, organizing new
ventures and completing projects of expansion, diversification and
modernization. By obtaining the listing and trading facilities, public investment is
increased and companies were able to raise more funds. The quoted companies
with wide public interest have enjoyed some benefits and assets valuation has
become easier for tax and other purposes.

Various Stock Exchanges in India:

At present there are 23 stock exchanges recognized under the securities
contracts (regulation), Act, 1956. Those are:

Ahmadabad Stock Exchange Association Ltd.

Bangalore Stock Exchange

Bhubaneswar Stock Exchange Association

Calcutta Stock Exchange

Cochin Stock Exchange Ltd.
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Coimbatore Stock Exchange
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Delhi Stock Exchange Association

Guwahati Stock Exchange Ltd

Hyderabad Stock Exchange Ltd.

Jaipur Stock Exchange Ltd

Kanara Stock Exchange Ltd

Ludhiana Stock Exchange Association Ltd
Madras Stock Exchange
Madhya Pradesh Stock Exchange Ltd.

Magadh Stock Exchange Limited

Meerut Stock Exchange Ltd.

Mumbai Stock Exchange
National Stock Exchange of India
OTC Exchange of India
Pune Stock Exchange Ltd.

Saurashtra Kutch Stock Exchange Ltd.

Uttar Pradesh Stock Exchange Association

Vadodara Stock Exchange Ltd.

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MAJOR STOCK EXCHANGES:

NSE

The National Stock Exchange of India Limited has genesis in the report of the
High Powered Study Group on Establishment of New Stock Exchanges, which
recommended promotion of a National Stock Exchange by financial institutions
(FI’s) to provide access to investors from all across the country on an equal
footing. Based on the recommendations, NSE was promoted by leading Financial
Institutions at the behest of the Government of India and was incorporated in
November 1992 as a tax-paying company unlike other stock exchanges in the
country. On its recognition as a stock exchange under the Securities Contracts
(Regulation) Act, 1956 in April 1993, NSE commenced operations in the
Wholesale Debt Market (WDM) segment in June 1994. The Capital Market
(Equities) segment commenced operations in November 1994 and operations in
Derivatives segment commenced in June 2000

NSE's mission is setting the agenda for change in the securities markets in
India. The NSE was set-up with the main objectives of:

Establishing a nation-wide trading facility for equities and debt instruments.
Ensuring equal access to investors all over the country through an
appropriate communication network.
Providing a fair, efficient and transparent securities market to investors using
electronic trading systems.
Enabling shorter settlement cycles and book entry settlements systems, and
Meeting the current international standards of securities markets.

The standards set by NSE in terms of market practices and technology, have
become industry benchmarks and are being emulated by other market
participants. NSE is more than a mere market facilitator. It's that force which is
guiding the industry towards new horizons and greater opportunities.
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BSE

The Stock Exchange, Mumbai, popularly known as "BSE" was established in
1875 as "The Native Share and Stock Brokers Association". It is the oldest one in
Asia, even older than the Tokyo Stock Exchange, which was established in 1878.
It is a voluntary non-profit making Association of Persons (AOP) and is currently
engaged in the process of converting itself into demutualised and corporate
entity. It has evolved over the years into its present status as the premier Stock
Exchange in the country. It is the first Stock Exchange in the Country to have
obtained permanent recognition in 1956 from the Govt. of India under the
Securities Contracts (Regulation) Act 1956.The Exchange, while providing an
efficient and transparent market for trading in securities, debt and derivatives
upholds the interests of the investors and ensures redresses of their grievances
whether against the companies or its own member-brokers. It also strives to
educate and enlighten the investors by conducting investor education
programmers and making available to them necessary informative inputs.

A Governing Board having 20 directors is the apex body, which decides the
policies and regulates the affairs of the Exchange. The Governing Board consists
of 9 elected directors, who are from the broking community (one third of them
retire ever year by rotation), three SEBI nominees, six public representatives and
an Executive Director & Chief Executive Officer and a Chief Operating Officer.
The Executive Director as the Chief Executive Officer is responsible for the day-
to-day administration of the Exchange and the Chief Operating Officer and other
Heads of Department assist him.

The Exchange has inserted new Rule No.126 A in its Rules, Byelaws pertaining
to constitution of the Executive Committee of the Exchange. Accordingly, an
Executive Committee, consisting of three elected directors, three SEBI nominees
or public representatives, Executive Director & CEO and Chief Operating Officer
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has been constituted. The Committee considers judicial & quasi matters in which
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the Governing Board has powers as an Appellate Authority, matters regarding
annulment of transactions, admission, continuance and suspension of member-
brokers, declaration of a member-broker as defaulter, norms, procedures and
other matters relating to arbitration, fees, deposits, margins and other monies
payable by the member-brokers to the Exchange, etc.

REGULATORY FRAME WORK OF STOCK EXCHANGE

A comprehensive legal framework was provided by the “Securities Contract
Regulation Act, 1956” and “Securities Exchange Board of India 1952”. Three tier
regulatory structure comprising
 Ministry of finance
 The Securities And Exchange Board of India
 Governing body

MEMBERS OF THE STOCK EXCHANGE:

The securities contract regulation act 1956 has provided uniform regulation for
the admission of members in the stock exchanges. The qualifications for
becoming a member of a recognized stock exchange are given below:
The minimum age prescribed for the members is 21 years.
He should be an Indian citizen.
He should be neither a bankrupt nor compound with the creditors.
He should not be convicted for fraud or dishonesty.
He should not be engaged in any other business connected with a
company.
He should not be a defaulter of any other stock exchange.
The minimum required education is a pass in 12th standard examination.
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SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)

The securities and exchange board of India was constituted in 1988 under a
resolution of government of India. It was later made statutory body by the SEBI
act 1992.according to this act, the SEBI shall constitute of a chairman and four
other members appointed by the central government.
With the coming into effect of the securities and exchange board of India act,
1992 some of the powers and functions exercised by the central government, in
respect of the regulation of stock exchange were transferred to the SEBI.

OBJECTIVES AND FUNCTIONS OF SEBI

To protect the interest of investors in securities.
Regulating the business in stock exchanges and any other securities
market.
Registering and regulating the working of intermediaries associated with
securities market as well as working of mutual funds.
Promoting and regulating self-regulatory organizations.
Prohibiting insider trading in securities.
Regulating substantial acquisition of shares and take over of companies.
Performing such functions and exercising such powers under the
provisions of capital issues (control) act, 1947and the securities to it by
the central government.

SEBI GUIDELINES TO SECONDARY MARKETS: (STOCK EXCHANGES):

Board of Directors of Stock Exchange has to be reconstituted so as to include
non-members, public representatives and government representatives to the
extent of 50% of total number of members.
Capital adequacy norms have been laid down for the members of various
stock exchanges depending upon their turnover of trade and other factors.
All recognized stock exchanges will have to inform about transactions within
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24 hrs.
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CHAPTER-3
ELECTRONIC SETTLEMENT OF TRADE

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CHAPTER-3

ELECTRONIC SETTLEMENT OF TRADE

A. Procedure for purchasing dematerialized
Securities:-

The procedure for purchasing dematerialized securities is also similar to the
procedure for buying physical securities.

1. Investor instructs DP to receive credits into his account in the prescribed
form. There may be one time standing instruction or separate instruction
each time to receive credits.
2. Investor purchases securities in any of the stock exchanges linked to
depository through a broker.
3. Broker receives payment from investor and arranges payment to clearing
corporation.
4. Broker receives credit to securities in clearing account on the payout day.
5. Broker gives instructions to DP to debit clearing account and credit client’s
account. Investor receives shares into his account by way of book entry.

B. Procedure of selling dematerialized securities

The procedure for selling dematerialized securities in stock exchanges is
similar as selling physical securities. The only major difference is that instead of
delivering physical securities to the broker, the investor instructs his DP to debit his
demat account with the number of securities sold by him and credit the brokers
clearing account. The procedure for selling dematerialized securities is given below:
1. Investor sells securities in any of the stock exchange linked to
depository through a broker.
2. Investor instructs his DP to debit his demat account with the number
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of securities sold and credit the broker’s clearing account.
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3. Before the pay-in-day, broker of the investor transfers the securities to
clearing corporation.
4. The broker receives payment from the stock exchange.
5. The investor receives payment from the broker for sale of securities in
the same manner as received in case of sale of physical securities.

REMATERILISATION OF SHARES

Rematerialization is the process of conversion of electronic holdings of
securities into physical certificate form. For rematerilisation of scrip’s, the investor
has to fill up a demat request form (RRF) and submit it to the DP. The DP forwards
the request to depository after verifying the investor’s balances. Depository in turn
initiates the registrars and transfer agent or the issuer company. RTA/ Company
print the certificates and dispatch the same to the investor.

Market timings:

Normal Market / Exercise Market Open time : 09:00 hours
Normal market close : 15:30 hours
Set up cut of time for Position limit/Collateral value : till 15:30 hrs
Trade modification end time / Exercise Market : 16:15 hour

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INTERNET BASED TRADING THROUGH ORDER ROUTING SYSTEMS

Internet based trading on conventional exchanges, uses the Internet
as a medium for communicating client orders to the exchange, through
broker web sites. Broker’s web sites may serve a variety of functions. These
may include;
Allowing the clients to directly trade through investors;
Advertise the broker dealers’ services to potential investors;
Offer market information and investment tools similar to those
offered by information vendor or SRO web sites;
Offer real-time or delayed quote information, continuously update
quotes while the user visits other sites, or allow investors to create a
personal stock ticker;
Provide market summaries and commentaries, analyst reports and
trading strategies and market data on currencies, mutual funds,
options, market indices and news; and
Offer investors access to portfolio management tools and analytic
programs;
Information on commission and fees; and
Account information and research reports.

In an Order Routing system, a broker offering Internet trading facility
provides an electronic template for the customer to enter the name of the security,
whatever it is to be bought or sold, the quantity and whatever the order is a market
or limit order. Once the broker’s system receives this information.
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USE OF INTERNET AS ALTERNATIVE TRADING SYSTEMS (PROVISION FOR PRICE
DISCOVERY AND MATCHING OUTSIDE CONVENTIONAL EXCHANGES)

In foreign jurisdiction, Alternative trading systems have been developing
outside conventional securities markets, which provide investors with additional
proprietary electronic trading facilities for securities that are traded principally on
securities exchanges, or other organized markets. They have price discovery
functions, matching systems and crossing systems. The systems that are currently in
use in outside jurisdictions are closed systems and are not accessible to the general
public through the Internet. The securities markets regulators abroad the maintained
flexible and open policies designed to encourage innovation in the secondary
securities markets. As a result, a number of market participants, usually broker-
dealers, have developed computerized “alternative trading systems” by which the
system centralize, display, match, cross or otherwise execute trading interest.

USE OF INTERNET FOR MAKING INITIAL PUBLIC OFFERINGS

Issues of securities of using the Internet to communicate directly with their
shareholders, potential investors and analysts by disseminating corporate
information. In foreign jurisdiction, they are also using the Internet to communicate
to the public for the following:
Public offerings;
Private offerings; and
Disclosure and communication
Issuers are using the Internet to market themselves to potential investors.
The Internet is also being used for fulfilling necessary disclosure requirements, for
disseminating the prospects in electronics form and even for receiving share
applications in public issues electronically. In India, SEBI has taken initiative in
permitting use of the network of stock exchange for collection of investor
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applications in public offerings by the issuer companies
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INVESTMENT ADVISORY SERVICES

Brokers as well as other service provides such as investment firms, research
outfits etc. are using the Internet for marketing and advertising purposes, for
presenting information on portfolio analysis and market information, and for
communicating with and receiving orders from potential investors. The services
offered by the service providers to the investors are generally the following:
Advertising
Providing investment information and investment advice;
Underwriting
Communicating with the investors;
Customer orders; and
Record keeping

WORKING GROUPS SET UP BY THE COMMITTEE

Considering the present state of capital markets in India and keeping in view
the ongoing developments in Internet based securities business, it was felt that SEBI
as a regulator could strive to identify areas where use of Internet in the capital
market is possible within the existing legal framework. One such area identified by
the Committee, which is also the central within the existing legal framework. One
such area identified by the Committee, which is also the central theme of this report,
is the area of Internet trading on existing electronic exchange. In this area, through
early introduction of Cyber Laws would be highly describe but their existence is not a
necessary precondition. To look into the existing regulatory scenario and to bring out
some ground rules for use of the medium of Internet, the Committee therefore
constituted the following two working groups to look into the area of:
i. Security protocols and standardization of interfaces for Interest based
securities trading, chaired by Prof. Deepak B. Phatak, IIT, Pawai, Mumbai
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ii. Surveillance and monitoring related issues arising due to Interest based
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securities trading, chaired by Shri. L.K. Singhvi, Sr. ED, SEBI


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The committee also requested Ms D N Raval, Executive Director, SEBI to examine
the legality of introduction of Internet trading and issue of Alternative trading
systems. This report of the standing committee examines the regulatory and security
requirements Internet Based Trading on Conventional Exchanges. Separate reports
(s) will cover the other areas related to Internet applications in the securities
markets.
The report of the first working group on security protocols and
standardization of interfaces has since been submitted and incorporated in the
report. The committee would like to place on record its sincere thanks to Dr. D.B.
Phatak, Ms. D.N. Raval and their team members. The global financial market is
undergoing a transformation due to rapid technological developments. It thus
becomes imperative that for developing in effective regulatory framework
developments in other parts of the world should be studies and analyzed. With
nearly who million on-line investors, Internet trading in the United States is growing
by leaps and bounds. Internet trading is being facilitated by large brokerage houses,
thus changing the total concept of securities trading. A team comprising of members
from stock exchanges and SEBI visited the United States to these development and
had interactions with brokerages houses, Internet service providers and other
agencies involved in facilitating Internet trading.
The team also discussed the developments in the emerging regulatory and
supervisory framework in United States with the Securities and Exchange
Commission officials. They were also tripped of the various initiatives taken by SEC in
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RECOMMENDATIONS OF THE COMMITTEE

Application for Permission by Brokers

SEBI registered Stock Brokers interested in providing Internet based trading
services will be required to apply to the respective stock exchange for a formal
permission. The stock exchange should grant approval or reject the application as
the case may be, and communicate its decisions to the number within 30 calendar
days of the date of completed application submitted to the exchange. The stock
Exchange, before giving permission to brokers to start Internet based services shall
ensure the fulfillment of the following minimum conditions.

Net worth Requirement

The broker must have a minimum net worth of Rs. 50 lacs if the broker is
providing the Internet based facility on his own. However, if some brokers
collectively approach a service provider for providing the interest trading facility, net
worth, criteria as stipulated by the stock exchange will apply. The net worth will be
computed as per the SEBI circular no FITTC/DC/CIR-1/98 dated June 16, 1998.s

Operational and System Requirements:
Operational Integrity:
The stock Exchange must ensure that the system used by the broker has
provision for security, reliability and confidentiality of data through use of encryption
technology. This stock exchange must also ensure that records encryption
technology. The stock Exchange must also ensure the records maintained in
electronic from by the broker are not susceptible to manipulation.
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System Capacity
The stock Exchange must ensure that the brokers maintain adequate backup
systems and data storage capacity. The stock Exchange must also ensure that the
workers have adequate system capacity for handling data transfer, and arranged for
alternative means of communications in case of Internet link failure.

Qualified Personnel:
The stock Exchange must lay down the minimum qualification fro personnel
to ensure that the broker has suitably qualified and adequate personnel to handle
communication including instructions as well as other back office work which is likely
to increase because of higher volumes.

Written Procedures:
Stock Exchange must develop uniform written procedures to handle
contingency Tuitions and for review of incoming and outgoing electronic
correspondence.

Signature Verification/ Authentication:
It is desirable that participants use authentication technologies. For this
purpose is should be mandatory for participants to use certification agencies as and
when notified by Government/SEBI. They should also clearly specify when manual
signatures would be required.

Client Broker Relationship
Know Your Client:
The stock Exchange must ensure that brokers have sufficient, verifiable
information about clients, which would facilitate risk evaluation of clients.
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Broker- Client Agreement:
Brokers must enter into an agreement with clients spelling out all obligations
and rights. This agreement should also inter alia, the minimum service standards to
be maintained by the broker for such service specified by SEBI/Exchange for the
internet based trading from time to time. Exchange will prepare a model agreement
for this purpose. The broker agreement with clients should not have

Investor Information:
The broker web site providing the internet based trading facility should
contain information meant for investor protection such as rules and regulations
affecting client broker relationship arbitration rules, investor protection rules etc.
The broker web site providing the Internet based trading facility should also provide
and display prominently, hyper link to the web site/page on the web site of the
relevant stock exchange (s) displaying rules/ regulations/ circulars.
Ticker/quote/order book displayed on the web-site of the broker should display the
time stamp as well as source of such information against the given information.

Order/Trade Confirmation:
Order/Trade confirmation should also be sent to the investor through email
at client’s discretion at the time specified by the client in addition to the other made
of display of such confirmation of real time basis on the broker web site. The
investor should be allowed to specify the time interval on the web site itself with in
which he would like to receive this information through email. Facility for
reconfirmation of orders which are larger than that specified by the member's risk
management system should be provided on the internet based system.

Handling Complaints by Investors:
Exchanges should monitor complaints from investors regarding service
provided by brokers to ensure a minimum level of service. Exchange should have
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separate cell specifically to handle Internet trading related complaints. It is desirable
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that exchanges should also have facility for on-line registration of complaints on
their web site.

Risk Management:
Exchanges must ensure that brokers have a system-based control on the
trading limits of clients, and exposures taken by clients. Brokers must set predefined
limits on the exposure and turnover of each client. The broker systems should be
capable of assessing the risk of the client as soon as the order comes in. The client
should be informed of acceptance/rejection of the order within a reasonable period.
In case system based control rejects an order because of client having exceeded
limits etc., the broker system may have a review and release facility to allow the
order to pass through.

Contract Notes:
Contract notes must be issued to clients as per existing regulations, within 24 hours
of the trade execution.

Cross Trades:
As a matter of abundant precaution, the committee seeks to reiterate that as
III the case of existing system, brokers using Internet based systems for routing client
orders will also not be allowed to cross trades of their clients with each other. All
orders must be offered to the market for matching.
It is emphasized that in addition to the requirements mentioned above, all
existing obligations of the broker as per current regulation will continue without
changes. Exchanges may also like to specify more stringent standards as they may
deem fit for allowing Internet based trading facilities to their brokers.
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Enforcement:
A separate working group has been set to look into the surveillance and
enforcement related issues arising due to Internet based securities trading.
However, general anti-fraud provisions (SEBI Fraudulent and Unfair Trade Practices
Regulations, 1995) would apply to all transactions involving securities or financial
services, regardless of the medium.

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CHAPTER-4

DEFINITIONS AND EXPLANATIONS

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CHAPTER-4

DEFINITIONS AND EXPLANATIONS

1. SHARES:-

In everyday language, when we talk of shares we normally refer to
equity shares or ordinary shares of a company. The terms shares and stock
essentially means the same things, the letter being a more common
American usage.

An equity share is evidence of ownership in a company. The physical
evidence of this ownership of this document is called the Share Certificate.
Now days, shares are usually kept in electronic, or dematerialized, form with
a depository participant (Banks, brokers, financial institutions) of the National
Securities

Depository Limited (NSDL). However, if one wants one can still hold
the share in the physical form which has your name endorsed on it, and is
proved that you are a part owner of the company. Your ownership rights are
proportionate to the number of share you own.

Companies issue shares of a certain fixed denomination, called face
value or par value of that share, which is clearly indicated on a share
certificate in the physical form.

2. INVESTMENT: -
Investment essentially refers to what you do with your savings in
order to preserve them and make them grow or yield an income. If you keep
your savings in the form of cash, they are certainly going to diminish in value
because the purchasing power of money is constantly going down as a result
of inflation. (The value of money is judged by the quantity of goods and
services you can buy with it). Therefore, if you want to maintain or increase
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the value of your savings, you have to keep them in forms other than cash.
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This is what investment is all about, deployment of your saving with the
intentions of preserving or increasing their value. This deployment can be
done by using your savings to buy land, residential properties, commercial
properties, gold, jewelry, works of art, fixed deposits in banks and companies,
shares, bonds, infact, anything whose value is likely to either remain constant
or appreciate with time. Investment also refers to using one's savings with
the intention of earning an income.

3. DEMAT A/C:-
On doing an online business ever customer has to open and demat account in
any bank whichever he likes. Demat account is the account in which the trading
done by the customer is mentioned. If the customer sales or purchases any share
the details of this sale and purchasing are in demat account. This account
contents the name of the shares and also the number of shares held

Or sold and also the rate of the share with this demat account. It is also
compulsory for every customer to open a saving account in the bank because the
amount which is to be received when the customers sales the shares are
transferred from the demat account to the saving account.

It is the responsibility of the customers that the share which he purchased or
sales are properly transferred in demat account from the stock exchange
whichever he deals. The amount of dividend whichever to be received on the
shares when held for one or more year are also transferred in this demat account.
It is compulsory for every customer to have a PAN no. For opening a demat
account. If PAN no. Is not there is no chance for the customer to do any trading
on line. There is no limit of amount to deal in this account.
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4. CIRCUIT LIMIT:-
While issuing the shares to the public the company has to fix a particular limit
of the rate of the per share this limit is called as circuit limit. This circuit limit is
generally fixed on the percentage basis. This circuit limit is applied to both the
ends of the share. That is to the upper limit also and also to the lower limit
actually circuit limit is of two types

1) Upper limit
2) Lower limit
It is compulsory for every company to fix the circuit limit. This limit is
beneficial to both. The customer and also to the company generally every company
fix below 10%of the rate of per share.

5. UPPER LIMIT: -
While issuing the shares to the public the company has to fix the upper limit
this limit is also calculated in percentage the limit is also beyond which the rate of
the shares cannot exceed nor that the customer doing the trading can sell above the
level.
For ex. Customer wants to sell a share which is of Rs10 and its
upper limit is fixed at 10% so in this case the person will have to sell it at Rs11 or the
rate which ever he wants but the person cannot sell it beyond this Rs 11 because by
addition of upper limit to the rate of share the maximum amount of the shares is Rs
11 only and not above.

6. LOWER LIMIT: -
At the time of issuing share the company has to fix the lower limit also. This
lower limit is calculated on the basis of the rate of the shares. This limit bears the
same percentage, which is mentioned for the upper limit of the share. Like upper
limit in this limit also the share minimum rate of the share is fixed the customer who
wants to see; the holding shares has to first consider the upper & lower limit of the
38

share he cannot sell the share below the lower limit and not above the upper limit
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10% of the face value of the shares the percentage is below 10% of the face value of
the shares the percentage of the upper &lower limit is equal to every type of share
For ex. Suppose the person wants to sell the shares and the
rate of the share is Rs. 10/- and the lower limit percentage is 10% of the rate. So in
this case the person cannot sell the share at below Rs. 9/-. He will have to sell at
above Rs. 9/- or up to the upper limit of the share.

7. SENSEX:-
When the shares are issued to the public the stock exchange gives a
particular group to the company. For ex. The Reliance Group is given the group “A”
like this there are several companies which fall in “A” Group. The weightage mean is
calculated according to its equity when all the companies of Group “A” has
calculated this weightage mean they are added all together when this addition is
done the result which comes down is known as “Sensex”.

The trading of shares of “A” group is totally depended on this sensex value.
The price of the share rises this sensex value also rises and when the price of this
share comes down the sensex value also comes down. With the sensex

8. SCRIPTS:-

The company, which has more than one working area, it has to issue the
share separately than that company is the company which has the script of its name.

For Ex. The Reliance this company has its several working area Namely
Reliance, Capital Reliance, Infocom Reliance Energy, Reliance Industry. So reliance
company issues separate share for separate working area but the bold name which is
given to the working area is “Reliance”. So in this case Reliance has its own scripts.
Other example Ambuja, Birla, Etc.

9. GROUPS:-
When the shares are issued by the company they are given the particular group
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by the Stock exchange according to its demand in the market. There are mainly 7
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The scripts traded on the BSE have been classified into ‘A’,’B1’,’B2’,’C’,’F’ and ‘Z’
groups. The ‘A’ group represents those, which are in the carry forward system. The
‘F’ group represents the debt market segment (fixed income securities). The Z group
scripts are of the blacklisted companies. The ‘C’ group covers the odd lot securities in
‘A’, ‘B1’&’B2’ groups.

10. TYPES OF ORDERS:
Buy and sell orders placed with members of the stock exchange by the investors.
The orders are of different types.

Limit orders:

Orders are limited by a fixed price. E.g. ‘buy Reliance Petroleum at
Rs.50.’Here, the order has clearly indicated the price at which it has to be bought
and the investor is not willing to give more than Rs.50.

Best rate order:

Here, the buyer or seller gives the freedom to the broker to execute the
order at the best possible rate quoted on the particular date for buying. It may
be lowest rate for buying and highest rate for selling.

Discretionary order:

The investor gives the range of price for purchase and sale. The broker can
use his discretion to buy within the specified limit. Generally the approximation
price is fixed. The order stands as this “buy BRC 100 shares around Rs.40”.
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Stop loss order:

The orders are given to limit the loss due to unfavorable price movement in
the market. A particular limit is given for waiting. If the price falls below the limit,
the broker is authorized to sell the shares to prevent further loss. E.g. Sell BRC
limited at Rs.24, stop loss at Rs.22.

11. BUYING AND SELLING SHARES:

To buy and sell the shares the investor has to locate register broker or sub
broker who render prompt and efficient service to him. The order to buy or sell
specifying the number of shares of the company of investors’ choice is placed
with the broker. The order may be of any type. After receiving the order the
broker tries to execute the order in his computer terminal. Once matching order
is found, the order is executed. The broker then delivers the contract note to the
investor. It gives the details regarding the name of the company, number of
shares bought, price, brokerage, and the date of delivery of share. In this physical
trading form, once the broker gets the share certificate through the clearing
houses he delivers the share certificate along with transfer deed to the investor.
The investor has to fill the transfer deed and stamp it. The stamp duty is one of
the percentage considerations, the investor should lodge the share certificate
and transfer deed to the register or transfer agent of the company. If it is bought
in the DEMAT form, the broker has to give a matching instruction to his
depository participant to transfer shares bought to the investors account. The
investor should be account holder in any of the depository participant. In the
case of sale of shares on receiving payment from the purchasing broker, the
broker effects the payment to the investor.
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12. ROLLING SETTLEMENT SYSTEM:
SETTLEMENT CYCLE SCHEDULE

SR. NO. DAY DESCRIPTION OF ACTIVITY TRADE
1 T Trading Day
2 T +2 PAY IN BY 10.30 am.
3 T +2 PAY – OUT BY 2 pm.
4 T +3 Auction of shortage in deliveries
5 T +5 Auction pay-in by 10.30 (1 am/ pay
Out by 2 pm.)

Under rolling settlement system, the settlement takes place n days (usually 1,
2, 3 or 5days) after the trading day. The shares bought and sold are paid in for n
days after the trading day of the particular transaction. Share settlement is likely
to be completed much sooner after the transaction than under the fixed
settlement system.
The rolling settlement system is noted by T+N i.e. the settlement period is n
days after the trading day. A rolling period which offers a large number of days
negates the advantages of the system. Generally longer settlement periods are
shortened gradually.
SEBI made RS compulsory for trading in 10 securities selected on the basis of
the criteria that they were in compulsory demats list and had daily turnover of
about Rs.1 crore or more. Then it was extended to “A” stocks in Modified Carry
Forward Scheme, Automated Lending and Borrowing Mechanism (ALBM) and
Borrowing and lending Securities Scheme (BELSS) with effect from Dec 31, 2001.
SEBI has introduced T+5 rolling settlement in equity market from July 2001
and subsequently shortened the cycle to T+3 from April 2002. After the T+3
rolling settlement experience it was further reduced to T+2 to reduce the risk in
the market and to protect the interest of the investors from 1st April 2003.
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Activities on T+1:

Conformation of the institutional trades by the custodian is sent to the stock
exchange by 11.00 am. A provision of an exception window would be available
for late confirmation. The time limit and the additional changes for the exception
window are dedicated by the exchange.
The exchanges/clearing house/ clearing corporation would process and
download the obligation files to the broker’s terminals late by 1.30 p.m on T+1.
Depository participants accept the instructions for pay in securities by investors
in physical form up to 4 p.m and in electronic form up to 6 p.m. the depositories
accept from other DPs till 8p.m for same day processing.

Activities on T+2:

The depository permits the download of the paying in files of securities and
funds till 10.30 am on T+2 from the brokers’ pool accounts. The depository
processes the pay in requests and transfers the consolidated pay in files to
clearing House/clearing Corporation by 11.00am/on T+2. The exchange/clearing
house/clearing corporation executes the pay-out of securities and funds latest by
1.30 p.m on T+2 to the depositories and clearing banks. In the demat mode net
basis settlement is allowed. The buy and sale positions in the same scrip can be
settled and net quantity has to be settled.

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CHAPTER-5

OUTCRY SYSTEM AND ONLINE
TRADING SYSTEM

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CHAPTER-5

OUTCRY SYSTEM

The broker has to buy or sell securities for which he has received the orders.
For this, the broker or his authorized representatives goes to the stock exchange.
This method is called the open outcry system. Basically the brokers shout while
buying or selling the securities. The floor of the stock exchange is divided into a
number of markets also known as ‘post pit’ or wing based on particular securities
dealt there.
In the post pit or wing, the broker using ‘open outcry’ method makes an offer
or bid price. For making the necessary bargain, he quotes his purchase or sale
price, also known as offer or bid price. The dealer, to whom the price is quoted,
quotes his own price when the quotation of the dealer suits the broker, he may
loose the bargain. If he is not satisfied with the quote price, he may turn to some
other dealer. On the close of the bargain, the dealer as well as the broker makes
a brief note of the particulars of the deal. Such notes are made on some pad and
on it the number of shares, the price agreed upon, the name of the party, what
membership number etc., are noted.

DISADVANTAGES OF OUTCRY SYSTEM:
It lacks transparency.
The scope of manipulation, speculation and mal practice is more.
Signal were more important in the outcry system any member who could not
interpret the buy/sell signal correctly often landed himself in disaster
situation.
In audibility was another disadvantage of the outcry system.
Due to the above disadvantages of the outcry system the SHAREKHAN has
shifted from outcry system to online trading from February 29th 1997.
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MANUAL TRADING

Trading procedure before introduction of online trading

Trading on stock exchanges is officially done in the trading ring. In the trading
ring the space is provided for specified and non-specified sections, the members
and their authorized assistants have to wear a badge or carry with them an
identity card given by the exchange to enter the trading ring. They carry a sauda
book or confirmation memos, duly authorized by the exchange and carry a pen
with them. The stock exchanges operations are floor level are technical in nature
.Non-members are not permitted to enter in to stock market. Hence various
stages have to be completed in executing a transaction at a stock exchange .The
steps involved in this method of trading have given below:

Choice of broker:

Sell shares and transact business, have to act through member brokers only.
They can also appoint their bankers for this purpose as per the present
regulations.

Placement of order:

The next step is the prospective investor who wants to buy shares or the
investors, who wants to place order for the purchase or sale of securities with a
broker. The order is usually placed by telegram, telephone, letter, fax etc or in
person. To avoid delay, it is placed generally over the phone. The orders may
take any one of the forms such as At Best Orders, Limit Order, Immediate or
Cancel Order, Limited Discretionary Order, and Open Order, Stop Loss Order.
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Execution of order or contract:
Orders are executed in the trading ring of the BSE. This works from 11:30 to
2.30 P.M on all working days Monday to Friday, and a special one-hour session
on Saturday. The members or the authorized assistants have to wear a badge
given by the exchange to enter into the trading ring. They carry a sauda Block
Book or conformation memos, which are duly authorized by the exchange when
the deal is struck; both broker and jobber make a note in their sauda block
books. From the sauda book, the contract notes are drawn up and posted to the
client. A contract note is written agreement between the broker and his clients
for the transaction executed.

Drawing Up and Bills:

Both sale and purchase bills are prepared along with the contract note and it
is posted on the same day or the next day. This in a purchase transaction, once
the shares are delivered to the client effects payment for the purchases and pays
the stamp fees for transfer, a bill is made out giving the total cost of purchase,
including other expenses incurred by the broker in the price itself. With this, the
process ends.

DEMATERLIZATION:

Dematerialization is the process by which physical certificates of an investor
are converted to an equipment number of securities in electronic from and
credited in the investor account with his DP. In order to dematerialize the
certificates, an investor has to first open an account with a DP and then request
for the Dematerialization Request Form, which is DP and submit the same along
with the share certificates. The investor has to ensure that he marks “Submitted
for Dematerialization” on the certificates before the shares are handed over to
the DP for demat. Dematerialization can only be done to those certificates, which
are already registered in your name and belong to the list of securities admitted
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for Dematerialization at NSDL.
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Most of the active scrip’s in the market including all the scrip’s of S&P CNX
NIFTY and BSE SENSEX have already joined NSDL. This list is steadily increasing.
Briefly, the process is as follows: after completion of transfer, the investor gets
the option to dematerialize such shares. Investor’s willing to exercise this option
sends a Demat request along with the option letter sent by the company to his
DP. The company or its R&T agent would confirm the Demat request on its
receipt from the DP to reduce risk of loss in transit.
Dematerialized shares do not have any distinctive or certificate numbers. These
shares are fungible-which means that 100 shares of a security are the same as
any other 100 shares of the security. Odd lot shares certificates can also be
dematerialized.
Dematerialization normally takes about fifteen to thirty days. To get back
dematerialized securities in the physical form, request DP for Rematerialization
of the same is made.
Rematerialization is the process of converting electronic shares in to physical
shares.

BENEFITS OF DEMAT:

It reduces the risk of bad deliveries, in turn saving the cost and wastage of
time associated with follow up for rectification. This has lead to reduction
in brokerage to the extent of 0.5% by quite a few brokerage firms.
In case of transfer of electronic shares, you save 0.5% in stamp duty. You
avoid the cost of courier / notarization.
You can receive your bonuses and rights issues into your DA as a direct
credit, this eliminating risk of loss in transit.
You can also expect a lower interest charge for loans taken against Demat
shares as compared to loans against physical shares.
There is no lost in transit, thus the overheads of getting a duplicate copy
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in such circumstances is reduced.
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RBI has also reduced the minimum margin to 25% for loans against
dematerialized securities as against 50% for loans against physical
securities.

ONLINE TRADING

Before getting in to the online trading we should know some things about the
internet, e-commerce and etc.

1. What is Internet?
Internet is a worldwide, self-governed network connecting several other
smaller networks and millions of computers and persons, to mega sources of
information. This technology shrinks vast distances, accelerating the pace of
business reforms and revolutionizing the way companies are managed. It allows
direct, ubiquitous links to anyone anywhere and anytime to build up interactive
relationships.

A combination of time and space, called the Internet promises to bring
unprecedented changes in our lives and business. Internet or net is an inter-
connection of computer communication networks spanning the entire globe,
crossing all geographical boundaries. It has re-defined the methods of
communication, work study, education, business, leisure, health, trade, banking,
commerce and what not it is virtually changing every thing and we are living in
dot.com age. Net being an interactive two way medium, through various
websites, enables participation by individuals in business to business and
business to consumer commerce, visit to shopping arcades, games, etc. in cyber
space even the information can be copied, downloaded and retransmitted.
The use of Internet has grown 2000 percent in last decade and is currently
growing at 10 percent per month. In India, growth of Internet is of recent times.
It is expected to bring changes in every functional area of business activity
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including management and financial services. It offers stock trading at a lower
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cost. Internet can change the nature and capacity of stock broking business in
India.

2. E-commerce

Electronic commerce is associated with buying and selling over computer
communication networks. It helps conduct traditional commerce through new
way of transferring and processing of information. Information is electronically
transferred from computer to computer in an automated way. E-commerce
refers to the paperless exchange of business information using electronic data
inter change, electronic technologies. It not only reduces manual processes and
paper transactions but also helps organization move to a fully electronic
environment and change the way they operated.

PC’s and networking attempts to introduce banks of the tools and
technologies required for electronic commerce. The computers are either
workstations of individual office works or serves where large databases and
information reside. Network connects both categories of computers; the various
operating systems are the most basis program within a computer. It manages the
resources of the computer system in a fair and efficient manner.
Now we can enter in to the concept known as online trading.
In the past, investors had no option but to contact their broker to get real
time access to market data. The net brings data to the investor on-line and net
broking enables him to trade on a click of mouse. Now information has become
easily accessible to both retail as well as big investor.
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MEANING OF ONLINE TRADING

“Change is the law of nature”. There were times when man was a wanderer
or a normal. He himself had to go place to place in search of food, water and now
everything is available at your doorstep just at the click of the mouse. The growth of
information technology has affected almost all sectors of life. Internet has enabled
us to get every information at our doorstep. When Internet has affected all sectors
he could “stock markets” the most important player of the economy, has remained
far behind? Like all other sectors Internet has set its feet in the stock markets also.
Internet trading commissions are clearly posted on the websites of the
various services, and are typically a fixed rate charge, depending upon the type of
security being traded and the size of trade. In theory, therefore, an Interest investor
always knows what commission he is being charged on each trade. Internet investors
can take as much time as they would like to take prior to placing a trade order.
Similarly the online investor likely does not have to worry that his broker is making
unauthorized trades. Since there is no individual broker making a commission, the
only person who is authorized to trace in a account is the actual investor.
Furthermore, the internet investor can never become a victim of excessive trading
(where for the broker) since the investor maintains total control over the number of
transactions which take place in the account.
All of these positive features of internet trading may lead the unwary investor
to believe that Internet trading is a way to take control of their finances and save
more money in the process. Unfortunately, this is not always the case. The
advantages of Internet stock trading have also its weaknesses and these weaknesses
present significant drawbacks for the average investor.
First and foremost, the average investor is not an expert in the financial
markets. There is a danger for allowing the autonomy of online trading to hull you
into the belief that you are an expert investor. An online investor sitting at home at a
personal computer also foregoes proper investment advice and financial planning,
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perhaps among the most valuable services provided by traditional brokers.
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There are, of course, additional risks relative to performing transactions over
the Internet especially on a shared computer. Those people whom investors have
provided their account number and password can freely trade that account while the
investor will have little, if any, resource against the brokerage firm for the breach of
security.

WHY ONLINE TRADING ENTERED LATE IN INDIA?

The Indian exchanges and brokering houses have been very slow in moving their
transactions online and the major reason has been the lot government regulations. The
initial delay was due to laying down the specifications for creating Closed User Groups
(CUGs). This issue was resolved between the Department of Telecommunications (DoT) and
the Finance Ministry around 1998 and after that soon came the online trading portals like
IL&FS invests mart, ICICIDirect.com, motilaloswal.com, sharekhan.com etc. Connectivity
related issue was perhaps the most important technological factor.RBI made regulation that
it is mandatory for company to store at least 7 year financial and transactional data.
In the non-stop, 24 hours a day, seven days a week world of investing, we are able
to
 Obtain investment news around the clock
 Check quotes on exchanges all over the world – day or night
 Easily compare one investment to another via numerous ratios, charts,
graphs, and tables
 Screen for the best investments to fit our individual goals and requirements
 Trade stocks as easily and quickly as professional traders
 Calculate retirement needs based on various scenarios
 Regularly monitor portfolios and make necessary changes quickly and almost
effortlessly
 Control the routing of individual trades for the best possible price and
execution
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Even many years after the launch of the first online brokerage firm, there
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and call their stock broker to buy and sell investments. However, every year a
growing number of investors are placing their trades using online brokers.

EVOLUTION OF BROKING IN INDIA:

The evolution of a broking in India can be categorized in three phases -
Stockbrokers will offer on their sites features such as live portfolio
manager, live quotes, market research and news, etc. to attract more
investors.
Brokers will offer online broking and relationship management by
providing and offering analysis and information to investors during
broking and non-broking hours based on their profile and needs, i.e.
customized services.
Brokers (now e-brokers) will offer value management or services like
initial public offering online, on-line asset allocation, portfolio
management, financial planning, tax planning, insurance services, etc.
and enables the investors to take better and well considered decisions.
The actual definition of “Online Trading” is as explained below:
“Online trading is a service offered on the internet for purchase and sale of
shares. In the real world you place orders on your stockbroker either verbally
(personally or telephonically) or in a written form (fax).” In online trading, you
will access a stockbroker’s website through your internet enabled PC and place
orders through the broker’s internet based trading engine. These orders are
routed to the stock exchange without manual intervention and executed thereon
in a matter of a few seconds.
The net is used as a mode of trading in internet trading. Orders are
communicated to the stock exchange through website.
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In India:
Internet trading started in India on 1st April 2000 with 79 members seeking
permission for online trading. The SEBI committees on internet based securities
trading services has allowed the net to be used as an Order Routing System (ORS)
through registered stock brokers on behalf of their clients for execution of
transaction. Under the ORS the client enters his requirements (security, quantity,
price buy/sell) on broker’s site.

ONLINE TRADING BY NSE & BSE

The central computer located at the Exchange is connected to the
workstations of the Brokers through satellite using Very Small Aperture
Terminals (VSATs). Orders placed at the Brokers' workstations reach the central
computer and are matched by the computer based on price and time priority.
Both the exchanges have switched over from the open outcry trading system to a
fully automated computerized mode of trading known as BOLT (BSE on Line
Trading) and NEAT (National Exchange Automated Trading) System. It facilitates
more efficient processing, automatic order matching, faster execution of trades
and transparency. The scripts traded on the BSE have been classified into 'A',
'B1', 'B2', 'C', 'F' and 'Z' groups. The 'A' group shares represent those, which are in
the carry forward system (Badla). The 'F' group represents the debt market (fixed
income securities) segment. The 'Z' group scripts are the blacklisted companies.
The 'C' group covers the odd lot securities in 'A', 'B1' & 'B2' groups and Rights
renunciation

Objectives:
Internet trading is expected to
Increase transparency in the markets,
Enhance market quality through improved liquidity, by increasing quote
continuity and market depth,
Reduce settlement risks due to open trades, by elimination of
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Provide management information system,
Introduce flexibility in system, so as to handle growing volumes easily and
to support nationwide expansion of market activity.

Besides, through internet trading three fundamental objectives of securities
regulation can be easily achieved, these are:
Investor protection
Creation of a fair and efficient market, and
Reduction of the systematic risks.

Some of the brokers offering net trading include ICICI direct, kotakstreet, etc.

REQUIREMENTS FOR NET TRADING:

For investors:

1. Installation of a computer with required specification
2. Installation of a modem
3. Telephone connection
4. Registration for on-line trading with broker
5. A bank account
6. Depository account
7. Compliance with SEBI guidelines for net trading

The following should be produced to get a demat account and online trading
account:

As identity proof & address proof any one of the following:

Voter ID card
Driving license
PAN card( in case of to trade more than 50000)
Ration card
Bank pass book
Telephone bill
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Other requirements, which are necessary

First page of the bank pass book and last 6 months statement.
Bank manager’s signature along with bank’s seal, manager registration code
on photograph.

For stock brokers:

1. Permission from stock exchange for net trading
2. Net worth of Rs. 50 lac
3. Adequate back-up system
4. Secured and reliable software system
5. Adequate, experienced and trained staff
6. Communication of order (trade confirmation to investor by e-mail)
7. Use of authentication technologies
8. Issue of contract notes within 24 hours of the trade execution
9. Setting up a website.

The net is used as a medium of trading in internet trading. Orders are
communicated to the stock exchange through website. Internet trading started
in India on 1st April 2000 with 79 members seeking permission for online trading.
The SEBI committees on internet based securities trading services has allowed
the net to be used as an Order Routing System (ORS) through registered stock
brokers on behalf of their clients for execution of transaction.
Under the Order Routing System the client enters his requirements (security,
quantity, price, and buy/sell) in broker's site. They are checked electronically
against the clients account and routed electronically to the appropriate exchange
for execution by the broker. The client receives a confirmation on execution of
the order. The customer's portfolio and ledger accounts get updated to reflect
the transaction. The user should have the user id and password to enter into the
electronic ring. He should also have demat account and bank account. The
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system permits only a registered client to log in using user id and password.
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Order can be placed using place order window of the website.


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PROCEDURE FOR NET TRADING

Step 1: Those investors, who are interested in doing the trading over internet
system i.e. NEAT-IXS, should approach the brokers and get them self registered
with the Stock Broker.
Step 2: After registration, the broker will provide to them a Login name,
Password and personal identification number (PIN).
Step 3: Actual placement of an order. An order can then be placed by using the
place order window as under:
(a) First by entering the symbol and series of stock and other parameters like
quantity and price of the scrip on the place order window.
(b) Second, fill in the symbol, series and the default quantity.
Step 4: It is the process of review. Thus, the investor has to review the order
placed by clicking the review option. He may also re-set to clear the values.
Step 5: After the review has been satisfactory, the order has to be sent by
clicking on the send option.
Step 6: The investor will receive an "Order Confirmation" message along with the
order number and the value of the order.
Step 7: In case the order is rejected by the Broker or the Stock Exchange for
certain reasons such as invalid price limit, an appropriate message will appear at
the bottom of the screen. At present, a time lag of about 10 seconds is there in
executing the trade.
Step 8: It is regarding charging payment, for which there are different mode.
Some brokers will take some advance payment from the investor and will fix
their trading limits. When the trade is executed, the broker will ask the investor
for transfer of funds to his account.
Internet trading provides total transparency between a broker and an
investor in the secondary market. In the open outcry system, only the broker
knew the actually transacted price. Screen based trading provides more
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transparency. With online trading investors can see themselves the price at
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The time gap has narrowed in every stage of operation. Confirmation and
execution of trade reaches the investor within the least possible time, mostly
within 30 seconds. Instant feedback is available about the execution. Some of the
websites also offer;
News and research report
BSE and NSE movements
Stock analysis
IPO and mutual fund centers

STEP BY STEP PROCEDURE IN ONLINE TRADING:

Following steps explain the step by step approach to on-line trading:
Log on to the stock broker's website
Register as client/investor
Fill the application form and client broker agreement form on the requisite
value stamp paper
Obtain user ID and pass word
Log on to the broker's site using secure user ID and password
Market watch page will show real time on-line market data
Trade shares directly by entering the symbol or number of the security
Brokers server will check your limit in the on-line account and demat account
for the number of shares and execute the trade
Order is executed instantly (10-30 seconds) and confirmation can be
obtained.
Confirmation is e-mailed to investor by broker
Contract note is printed and mailed in 24 hours
Settlement will take place automatically on the settlement day
Demat account and the bank account will get debited and credited by
electronic means.
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ONLINE TRADING HAS LEAD TO ADDITIONAL FEATURES SUCH AS:

Limit / stop orders: orders that can be go unfilled, but there is an extra
Charge for this leeway facility since one need to hold a price.
Market orders: orders can be filled at unexpected prices, but this type is
much more risky, since you have to buy stock at the given price.
Cash account: where funds have to be available prior to placing the order.
Margin account: where orders can be placed against stocks, to increase
Purchasing power.

ADVANTAGES OF ONLINE TRADING:

Online trading has made it possible for anyone to have easy and efficient
access to more reports and charts than it was previously possible if one went
to any brokers' office. Thus we have access to a lot more information online.
Online trading has let room for smaller organizations to compete with
multinational organizations since it is no longer a leg it issue. Being online
does not identify the size of any particular organization, therefore, this
additional power to the underdogs.
Online trading has allowed companies to locate themselves where they want
as physical location is not an issue anymore. Companies can establish
themselves according to their gains and losses, for instance where tax (sales
and value added taxes) is best suited to them.
Online trading gives control to individuals and they can exercise it over
accounts thus comprehend what is going on when they trade. It is like going
back to school and re-educating oneself on how to trade online.
Individuals’ benefit by saving comparatively a lot more when trading online
as the cost per trade is less.
Individuals can invest in a variety of products, unlike earlier when people
bought bonds, mutual funds, and stock for long-term basis and sat on them.
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Now they can invest in stocks, stock and index options mutual funds,
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government, and even insurance.

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