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MBABT 516: STOCK AND FOREX TRADING LAB
RECORD
Lab report submitted in partial fulfillment of the requirements for the degree of
MBA: BANKING TECHNOLOGY
Submitted
By
PRAKASH RAJIV. S
Reg No. : 14381044
DEPARTMENT OF BANKING TECHNOLOGY
SCHOOL OF MANAGEMENT
PONDICHERRY UNIVERSITY
PONDICHERRY – 605 014
JANUARY 2016

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DEPARTMENT OF BANKING TECHNOLOGY
SCHOOL OF MANAGEMENT
PONDICHERRY UNIVERSITY
PONDICHERRY – 605 014
NAME : PRAKASH RAJIV S
REG. NO : 14381044
SUBJECT : Stock and Forex Trading lab
CODE : MBABT-516
Lab in charge Head of the Department
Submitted for the Practical Examination held on………………….
INTERNAL EXAMINER EXTERNAL EXAMINER
ACKNOWLEDGEMENT

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It gives me an immense pleasure to express my profound gratitude to my beloved guide Dr. S.
Sudalai Muthu,, Associate Professor, Department of Banking Technology, School of Management for his
consistent guidance and constant encouragement in this Lab work. His advice and systematic approach has
given a new dimension to this Lab work.
I express my special thanks to Dr. V. PRASANNA VENKATESAN, Professor and Head of the
Department of Banking Technology, School of Management, Pondicherry University, for his continuous
support, advice and encouragement.
I also express my sincere thanks to Mr. S.GOWTHAM RAJ, Authorized Person, Sharekhan Ltd for
giving us an opportunity to do stock and forex trading practices in their branch.
I am very grateful to my parents and the Almighty. Also I would like to express my heartfelt
gratitude to other Faculty and Friends for their help in making this record work successful.
PRAKASH RAJIV S
TABLE OF CONTENTS
1. OPENING OF PAN AND DP ACCOUNT............................................................................1
2. EVALUATION OF NEW ISSUE APPLICATION FORMS IPO EVALUATION ....................... .9

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3. IPO RISK FACTORS........................................................................................................12
4. SCREEN BASED TRADING.............................................................................................13
5. STUDY OF VARIOUS ORDER TYPES AND ORDER BOOKING .........................................18
6. TRADING AND SETTLEMENT ACTIVITIES .....................................................................24
7. PREPARATION OF TECHNICAL CHARTS........................................................................27
8. FUNDAMENTAL ANALYSIS OF A COMPANY ................................................................38
9. COMPANY SPECIFIC EVENTS AND IDENTIFICATION OF STOCK PRICE REACTION .......47
10. STUDY ON INDICES ...................................................................................................51
11. MARKETING OF MUTUAL FUNDS ............................................................................55
12. FUTURES AND OPTIONS ...........................................................................................64
13. A STUDY ON CLEARING AND SETTLEMENT ACTIVITIES IN FUTURES AND OPTIONS…….. 73
14. STUDY ON CURRENCY DERIVATIVES…………………………………………………...79
15. FOREX TRADING –BASICS……………………………………………………………..89
16. PROBLEMS ON FOREGIN EXCHANGE ARITHMETIC ................................................ .94
17. STUDY ON COMMODITY MARKETS ........................................................................103
SHAREKHAN LIMITED
INTRODUCTION
Sharekhan is one of the leading retail broking House of SSKI Group which was running successfully since
1922 in the country. It is the retail broking arm of the Mumbai-based SSKI Group, which has over eight
decades of experience in the stock broking business. Sharekhan offers its customers a wide range of equity
related services including trade execution on BSE, NSE, Derivatives, depository services, online trading,

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investment advisory, Mutual Fund Advisory etc.
The firm’s online trading and investment site - www.sharekhan.com - was launched on Feb 8, 2000.
The site gives access to superior content and transaction facility to retail customers across the country.
Known for its jargon-free, investor friendly language and high quality research, the site has a registered base
of over two lakh customers. The number of trading members currently stands More than 8 Lacs. While
online trading currently accounts for just over 8 per cent of the daily trading in stocks in India, Sharekhan
alone accounts for 32 per cent of the volumes traded online.
The content-rich and research oriented portal has stood out among its contemporaries because of its
steadfast dedication to offering customers best-of-breed technology and superior market information. The
objective has been to let customers make informed decisions and to simplify the process of investing in
stocks.
On April 17, 2002 Sharekhan launched Speed Trade, a net-based executable application that
emulates the broker terminals along with host of other information relevant to the Day Traders. This was for
the first time that a net-based trading station of this caliber was offered to the traders. In the last six months
Speed Trade has become a de facto standard for the Day Trading community over the net.
On October 01, 2007 Sharekhan again launched his another integrated Software based product Trade
Tiger, a net-based executable application that emulates the broker terminals along with host of other
information relevant to the Day Traders. It has another quality which differs it from other that it has the
combined terminal for EQUITY and COMMODITIES both.
Share khan’s ground network includes over 1005 centers in 410 cities in India, of which 210 are
fully-owned branches. Sharekhan has always believed in investing in technology to build its business. The
company has used some of the best-known names in the IT industry, like Sun Microsystems, Oracle,
Microsoft, Cambridge Technologies, Nexgenix, Vignette, Verisign Financial Technologies India Ltd, Spider
Software Pvt Ltd. to build its trading engine and content. Previously the Morakiya family holds a majority
stake in the company but now a world famous brand CITI GROUP has taken a majority stake in the

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company. HSBC, Intel & Carlyle are the other investors.
With a legacy of more than 80 years in the stock markets, the SSKI group ventured into institutional
broking and corporate finance 18 years ago. Presently SSKI is one of the leading players in institutional
broking and corporate finance activities. SSKI holds a sizeable portion of the market in each of these
segments. SSKI’s institutional broking arm accounts for 7% of the market for Foreign Institutional portfolio
investment and 5% of all Domestic Institutional portfolio investment in the country. It has 60 institutional
clients spread over India, Far East, UK and US. Foreign Institutional Investors generate about 65% of the
organization’s revenue, with a daily turnover of over US$ 4 million. The Corporate Finance section has a
list of very prestigious clients and has many ‘firsts’ to its credit, in terms of the size of deal, sector tapped
etc. The group has placed over US$ 1 billion in private equity deals. Some of the clients include BPL
Cellular Holding, Gujarat Pipavav, Essar, Hutchison, Planetasia, and Shopper’s Stop.
Sharekhan business
1. Brokering business.
2. White feathering house production.
Vision
To be the best retail broking brand in the retail business of the stock market.
Mission
To educate and empower the individual investor to make better investment decisions through quality
advices and superior services.
Stock exchange Mumbai
 Share khan is the retail broking arm of SSKI, an organization with more then eight decade of trust
and credibility in the stock market.
 Amongst pioneers of investment research in the Indian market.
 In 1984 venture into institutional broking and the corporate finance.

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 Leading domestic player in the Indian institutional business.
 Over US$5 billion of private equity deal.
 SSKI group companies
 SSKI investor services ltd (Sharekhan)
 S.S. Kantilal Isharlal securities
 SSKI corporate finance.
SHAREKHAN PROFILE
SHAREKHAN RETAIL BROKING
 Among the top three (3) branded retail services providers (Rs 856 crs average daily volume.
 NO. 2 player in online business
 Large network of branded broking outlets in the country servicing around 5, 45, 000 Clients
BENEFITS
 Free Depository A/c
 Secure Order by Voice Tool Dial-n-Trade.
 Automated Portfolio to keep track of the value of your actual purchases.
 24x7 Voice Tool access to your trading account.
 Personalized Price and Account Alerts delivered instantly to your Cell Phone & E-mail address.
 Special Personal Inbox for order and trade confirmations.
 On-line Customer Service via Web Chat.
 Anytime Ordering.
 NSDL Account
 Instant Cash Tranferation.
 Multiple Bank Option.

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 Enjoy Automated Portfolio.
 Buy or sell even single share.
PRODUCTS OF SHAREKHAN
CLASSIC ACCOUNT
This account allows the client to trade through the website www.sharekhan.com and is suitable for the retail
investor who is risk-averse and hence prefers to invest in stocks or who do not trade too frequently.
It allows investor to buy and sell stocks online along with the following features like multiple watch lists,
Integrated Banking, De-mat and Digital contracts, Real-time portfolio tracking with price alerts and Instant
money transfer.
FEATURES
 Online trading account for investing in Equity and Derivatives via www.sharekhan.com
 Live Terminal and Single terminal for NSE Cash, NSE F&O, BSE & Mutual Funds (online and offline).
 Integration of On-line trading, Saving Bank and De-mat Accounts.
 Instant cash transfer facility against purchase & sale of shares.
 Competative transaction charges.
 Instant order and trade confirmation by E-mail.
 Streaming Quotes (Cash & Derivatives).
 Personlized market watch.
 Single screen interface for Cash and derivatives and more.
 Provision to enter price trigger and view the same online in market watch.
TRADE TIGER
TRADE TIGER is an internet-based software application which is the combination of EQUITY &
COMMODITIES, that enables you to buy and sell share and well as commodities item instantly. It is ideal

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for every client of SHAREKHAN LTD.
FEATURES
 Integration of EQUITY & COMMODITIES MARKET.
 Instant order Execution and Confirmation.
 Single screen trading terminal for NSE Cash, NSE F&O & BSE & Commodities.
 Technical Studies.
 Multiple Charting.
 Real-time streaming quotes, tic-by-tic charts.
 Market summary (Cost traded scrip, highest value etc.)
 Hot keys similar to broker’s terminal.
 Alerts and reminders.
 Back-up facility to place trades on Direct Phone lines.
 Live market debts.
DIAL-N-TRADE
Along with enabling access for your trade online, the CLASSIC and TRADE TIGER ACCOUNT
also gives you our Dial-n-trade services. With this service, all you have to do is dial our dedicated phone
lines which are 1800-22-7500, 3970-7500.
PORTFOLIO MANAGEMENT SERVICES
Sharekhan is also having Portfolio Management Services for Exclusive clients.
1. PROPRIME - Research & Fundamental Analysis.
Ideal for investors looking at steady and superior returns with low to medium risk appetite. This portfolio

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consists of a blend of quality blue-chip and growth stocks ensuring a balanced portfolio with relatively
medium risk profile. The portfolio will mostly have large capitalization stocks based on sectors & themes
that have medium to long term growth potential.
2. PROTECH - Technical Analysis.
Protech uses the knowledge of technical analysis and the power of derivatives market to identify trading
opportunities in the market. The Protech lines of products are designed around various risk/reward/ volatility
profiles for different kinds of investment needs.
 THRIFTY NIFTY: Nifty futures are bought and sold on the basis of an automated trading system
that generates calls to go long/short. The exposure never exceeds value of portfolio i.e. there is no
leveraging; but being short in Nifty allows you to earn even in falling markets and there by generates
linear
 BETA PORTFOLIO: Positional trading opportunities are identified in the futures segment based
on technical analysis. Inflection points in the momentum cycles are identified to go long/short on
stock/index futures with 1-2 month time horizon. The idea is to generate the best possible returns in
the medium term irrespective of the direction of the market without really leveraging beyond the
portfolio value. Risk protection is done based on stop losses on daily closing prices.
 STAR NIFTY: Trailing Stops Momentum trading techniques are used to spot short term momentum
of 5-10 days in stocks and stocks/index futures. Trailing stop loss method of risk management or
profit protection is used to lower the portfolio volatility and maximize returns. Trading opportunities
are explored both on the long and the short side as the market demands to get the best of both
upwards & downward trends.
3. PROARBITRAGE - Exploit price analysis
- ONLINE IPO'S AND MUTUAL FUNDS ADVISORY IS AVAILABLE.
PROCESS OF ACCOUNT OPPENING

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LEAD MANAGEMENT SYSTEM (LMS) / REFERENCES
CONTACT
TELEPHONE AND PRESONAL VISIT
APPOINTMENT
DEMONSTRATION
AGREE DISAGREE (CLOSE)
DOCUMANTATION
FILLING THE FORM
SUBMISSION THE FORM
LOGIN OF THE FORM
SENDING THE ACCOUNT OPENING KIT TO THE CUSTOMER FOR TRADING
CHARGE STRUCTURE
1)- PRE PAID OR AMC A/C: -
 Advance Amount which will be fully adjsted against your brokerage you paid in One year.
Following Schemes Are Available: - Brokerage will be chagred -
1) - 750/- Scheme:- 0.05 / 0.50 %
2) - 1000/- Scheme 0.045 / 0.45 %
3) – 2,000/- Scheme: - 0.035 / 0.40 %
4) – 6,000/- Scheme: - 0.025 / 0.25 %
5) – 18,000/- Scheme: - 0.020 / 0.20 %
6) – 30,000/- Scheme: - 0.015 / 0.18 %

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7) – 60,000/- Scheme: - 0.010 / 0.15 %
8) – 1,00,000/- Scheme: - 0.0075 / 0.10 %
Minimum Margine of Rs. 25000/- is Required for Account Opening.
Annual Maintanance Charges will NIL for 1st year and Rs. 400/- from 2nd year.
- EXPOSURE : 4 TIMES (ON MARGINE MONEY)
- EXPOSURE : 10 TIMES (ON MAX TRADING)
- ONLINE IPO'S AND MUTUAL FUNDS ADVISORY IS AVAILABLE.
We are having tie-up with Eleven banks for online fund transfering i.e. HDFC, ICICI, IDBI, CITI,
Union Bank of India, Oriental Bank of Commerce, INDUSIND, AXIS, Centurian Bank of Punjab,
Bank of India and Yes Bank. Company Provide 4-6 E-mail to there customers per day.
Online Trade in Share
Sharekhan customers can online trade through there computers, through internet during the market timings.
Online Fund Transfer
We have tie up with Eleven Banks for online fund transferring i.e. HDFC, IDBI, CITI, UBI, OBC,
INDSLANDAND and UTI BANK, Yes bank, Bank of India for Online Money Transfer.
 Research based investment advice
 Investment and trading services
 Trading and seminars
 Technology based investment tools
 Integrated demat facility
 CUSTOMER CAN TRADE IN
o Equities
o Derivatives
o Commodities

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SWOT ANALYSIS OF SHAREKHAN
(My observation)
STRENGTHS
1. Big client base
2. In-house research house
3. online as well as offline trading
4. Online IPO/ MF services
5. Share shops
6. Transparent
7. User friendly tie ups with 10 banks
8. Excellent order execution speed and reliability
WEAKNESS
1. Lack of awareness among customer
2. Less focus on customer retention
3. Less Exposure
OPPORTUNITIES
1. Diversification
2. Product modification
3. Improve Web based trading
4. Provide competitive brokerage
5. Concentrate on PMS
6. Focus on Institutional investors
7. Concentrate on HNI’s (high net worth investor)
THREATS
1. Aggressive promotional strategies by close competitor like Religare, Angel Broking and India bulls.
2. More and more players are venturing into this domain, which can further reduce the earning of Share

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Khan.
3. Stock market is very volatile, risk involves is very high.

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1. OPENING OF PAN AND DP ACCOUNT
Opening of a PAN Card:
Permanent Account Number (PAN) card can be obtained by filling the form 49A issued by the
National Securities Depository Limited (NSDL) on behalf of Income tax department. Applications for the
PAN card can be obtained from any Income Tax office as well as any stock broking firms or any Banks
which is a depository participant.
Following are the people who can apply for obtaining a PAN card:
Category of Applicant Payment can be made by / for
 Individual  Self, immediate family members
(parents, spouse, children)
 HUF  Karta of the HUF
 Company  Any Director of the Company
 Firm  Any Partner of the Firm
 Association of Person(s) / Body of  Authorised Signatory covered
Individuals / Association of under section 140 of Income Tax
Person(s) Trust /Artificial Act, 1961
Juridical Person / Local Authority
You need to submit the following documents:
 Application Form 

 Proof of identity (list of options given below) 

 Proof of Address (list of options given below) 

 Demand draft / cheque or credit card payment acknowledgment copy 

 One color Photograph (size 3.5 cm x 2.5 cm) 
Copy of any one of the following can be submitted as Proof Address:
Electricity bill, Telephone bill, Depository account transaction statement, Credit card statement,

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Bank account statement, Ration card, Employer certificate, Passport Voters Identity card,
Property tax assessment order, Driving License, Rent receipt, Certificate of address signed by
Member of Parliament or Member of Legislative Assembly or Municipal Councilor or Gazetted
Officer.
Copy of any one of the following can be submitted as Proof Identity:
School leaving certificate, Matriculation certificate, Degree of a recognized educational
institution, Depository account transaction statement, Credit card, Bank account statement, Water
bill, Ration card, Property tax assessment order, Passport, Voters Identity Card, Driving License,
Certificate of identity signed by Member of Parliament or Member of Legislative Assembly or
Municipal Councilor or Gazetted Officer
OPENING OF BANK ACCOUNT
One can open an account with a deposit as low as Rs.100/- to Rs.300/-(Rs. 250/- for cheque
book facility and Rs.100/- without cheque book facility) depending upon the area and earn interest at
3.5% (w.e.f 01/03/2003) per annum. Computerized branches - Rs.500/- and Specialized hi-tech
branches - Rs.2000/-
The Bank's Savings Bank Rules are laid down in the various circulars issued by Head Office
From time to time. Managers and other Supervising Officials staff must read the instructions here
under in conjunction with the rules with which they must keep themselves fully conversant.
Opening of Accounts:
Accounts may be opened in the names of:-
I. Individuals, singly or jointly with other individuals;
II. Minors, or on behalf of minors by their guardians. Special Instructions in this regard are contained in
paragraphs 7 to 14;
III. Employees (in their individual names) of Schools and Colleges jointly with the Secretary/ Head
Master/Principal of the School/College, as the case may be for depositing provident fund moneys of the
employees provided there is no Trust Deed/Rules relating to the Provident Fund;
IV. Associations, Clubs or similar other non-trading institutions (or purpose of depositing savings, provided
the relevant bylaws, rules etc., are found acceptable and are strictly adhered to;

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7

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V. Societies registered under the Societies Registration Act, 1860 or any other corresponding law in
force in a State or a Union Territory;
VI. Companies governed by the Companies Act, 1956 which have been licensed by the Central
Government under Section 25 of the said Act or under the corresponding provision in the Indian
Companies Act, 1913 and permitted not to add lo their names the word limited' or the words
'private limited'.
VII. Institutions, which are not liable to pay Income Tax under the Income Tax Act
a. 1961.
b.Savings Bank Account of Hindu Undivided families provided The Hindu undivided family is not
engaged in trading and business activity. Such a Savings Bank account should be preferably
opened in the name of the Karta.
Only in exceptional circumstances will accounts be opened in the names of
companies (other than item VI above), Corporations, Proprietary or Partnership Firms, Trustees,
Liquidators etc., with prior permission of the Controlling Authorities.
An application to open a Savings Bank Account will be taken on Form No. 1725
according to whether the depositor wants an account with or without the facility of withdrawal by
cheque, if the applicant is not well known, he should be required to furnish a written introduction
from some respectable person known to the Bank (. All applications must be approved by the
Manager or Manager (Accounts) / Deputy Manager (Accounts) / Assistant Manager (Accounts).
After the accounts have been opened, the forms will be signed by the Manager or Manager
(Accounts) / Deputy Manager (Accounts) / Assistant Manager (Accounts) and will be numbered
with the account numbers and filed in serial order.
The application to open such an account is to be taken on Form No.1725 signed by the minor.
The minor should declare his/her date of birth, which may be accepted as prima facie in order and
no supporting evidence, need be called for. Introductory reference may be taken from the father or
mother where he/she is already known to the Bank or the Head Master/Principal of the educational
institution where the minor is studying. Upon the minor attaining majority, all that will need to be
done will be to note this fact in the account opening forms, specimen signature card and ledger
sheet for completion of record.

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When an account is opened in the names of two or more persons, who are not minors,
all of them must sign the application and the account will be operated in accordance with their
instructions on the back of the form, unless the instructions are rescinded by any one of them in
terms of the Savings Bank Rules. Under the same rules, the balance is repayable to the survivor or
survivors without reference to the representatives of the deceased person or persons.
Branches may open Savings Bank accounts in the names of two persons payable to
'Former or Survivor' or 'Later or Survivor' on similar lines on which Term Deposit Accounts are
opened.
Accounts will be opened segment wise in the Savings Bank ledger(s), each account being
allotted a serial number which will be entered in the pass book . The passbook should be handed over to
the depositor after the amount of the initial deposit has been credited to the account and entered in the
passbook under the initial of the supervising official.
An alphabetical index of accounts must be accurately maintained and kept upto date as
accounts are carried over to new folios or into new ledgers.
Specimen Signatures
Specimen Signatures will be obtained on specimen signature cards at the time of opening their
accounts and must be individually attested by the Manager or Manager (Accounts)/Deputy Manager
(Accounts)/Assistant Manager (Accounts). The same precautions must be taken to record as are observed
in the case of specimen signatures on constituent accounts (vide paragraph 149 and 150 of Chapter 3).
Specimen Signatures in Kannada or other Indian languages may be accepted.
Minimum Balance in Savings Bank account:-
The minimum balance to be maintained in the Savings Bank account with cheque book and
without cheque book is furnished in relation to the population category.
OPENING OF DP ACCOUNT
In order to avail of depository facilities, an investor has to open a beneficiary account with a
depository participant of his choice. This is similar to opening a bank account to use the banking
services.

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Just as one can hold funds in a bank account and transfer funds across accounts without actually
handling cash; one can hold securities in a depository account and transfer securities across depository
accounts without actually handling share certificates. The account holder is called 'beneficial owner' in a
depository system and the account is known as 'beneficiary account'.
Features of Beneficiary Account
 No minimum balance is required to be retained in a beneficiary account. 
 An investor can close a beneficiary account with one DP and open an account with another DP. 
 To dematerialized existing physical holdings, the beneficiary account must be opened in the same
ownership pattern in which the securities are held in the physical form e.g., if one certificate is in
individual name and another certificate is jointly held by X & Y, two different accounts should be
opened. However, in case of joint holders, securities can be dematerialized in the same account even
though share certificates are in different sequence of names e.g., shares held in joint names of X & Y
can also be dematerialized in an account opened in the names of Y & X as well by submitting an
additional form (Transposition Form) along with Demat Request Form to the DP.However, shares
held jointly by X & Y cannot be dematerialized in an account opened in the name of only X or only
Y or any combination of a joint account with three names i.e., X, Y and Z. 
Procedure
 Investor will choose a DP for the purposes of opening beneficiary account. The choice of the
investor may be based on convenience, comfort, services offered, cost or any other reason. 

 The investor will obtain the relevant account opening form from the chosen DP. 

 For the purpose of verification, investor has to submit the following documents along with the
prescribed account opening form. In case investor wants to open account jointly with other
person(s), following should be submitted for all the account holders: 
PROOF OF IDENTITY (POI) (COPY OF ANY ONE PROOF):

Passport



Voter ID Card



PAN card with photograph


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PROOF OF ADDRESS (POA) (COPY OF ANY ONE PROOF):
 Ration card
 Voted ID card
 Electricity Bill
Passport-Size Photograph
Copy of Pan Card
Original documents must be taken to the DP for verification. DP will carry out "in-person
verification" of account holder(s) at the time of opening the account.
Account opening form requires the applicants to give the following details:
 Name(s) of account holder(s) -The investor should ensure that the name is identical to that which
appears on the certificate(s) to be dematerialised. In case of joint holdings, account may be opened in
any one combination, irrespective of the sequence in which names are appearing on share certificates.
Investors are advised to open their account in their fully expanded name, i.e., to spell to the first
name as well as the middle name. This would obviate any doubts about the veracity of the
information. 

 Mailing and communication addresses - The veracity of the applicant's address is determined
through the documents submitted for verification like ration card, passport, voter ID, PAN card,
driving license, bank passbook, etc. For NRI accounts, proof is required for both addresses - that of
the account holder as well as the constituted attorney. For corporate accounts, a copy of
Memorandum of Association, Articles of Association, Board resolution permitting opening of
account, the registered address of the company have to be furnished. 

 Details of guardian in case account holder is a minor -Only a guardian can open a depository
account for a minor. The guardian is required to sign the application form, and details of his name
and address need to be given in addition to the details of the minor. 

Foreign Address and RBI approval details for NRI, FII or OCB accounts -For foreign-based
applicants like NRIs, Flls, OCBs, etc., the applicant must furnish original or attested copies of the
power of attorney and the approval letter from RBI permitting them to invest, as the case may be. If
the account holder is an FII or an OCB, SEBI registration details along with attested copy of

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registration certificate issued by SEBI and authorisation letter is required.

 Details of bank account -Details of bank account of the account holder, including the nine digit code
number of the bank and branch appearing on the MICR cheques issued by the bank have to be filled
in the application form. Companies use this information for printing them on dividend/interest
warrants etc. 

 Nomination declaration -A beneficial owner can make a nomination of his account in favour of any
person by filing the nomination form with his DP. Such nomination is considered to be conclusive
evidence of the account holder'(s) disposition in respect of all the securities in the account for which
the nomination is made. 

 Standing Instruction - a facility of standing instruction is provided to the investors for receiving
securities to the credit of their accounts without giving a separate receipt instruction. 
The Demat account cannot be operated on "either or survivor" basis like the bank account. In
case of the joint account for the beneficial owners, all the joint holders have to sign the account
opening form.
The investor will submit to his DP the duly filled in account opening form & DP-client
agreement along with the documents. The DP will verify whether the account opening form has been
duly filled in or not. He will also verify the submitted documents. For corporate investors, the DP
will also verify whether the board resolution for the authorised signatories has been enclosed. The DP
will ensure that client's signature is recorded on the form which will serve as specimen for
authorizations in future.
If the application form and documents are in order, the DP will accept them and give an
acknowledgement slip duly signed and stamped to the client. The DP will execute the agreement and
give a copy of it to the client.
After completion of all documentation, the DP will enter the client details as mentioned in the
account opening form in the DPM (software provided by NSDL to the DP) screen provided for the
purpose. After entering client details in the system, a client account number will be generated by the
DPM. The DP will enter this in the account opening form.

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On successful opening of the account, the DP will give:
 Client Id - an eight digit number to be used along with DP Id for any future transactions. 

 Delivery Instruction slip book. 

 A copy of the report listing the client details captured in the DPM database to the client. The 
report will be generated by the DPM.
Precautions:
 Corporate investors to enclose Memorandum of Association/Trust deed/Board resolution for
the authorised signatories along with the account opening form. 

 Details with respect to the bank account details of an investor must be indicated in the space
provided for the same in the account opening form. 

 If an investor is interested in availing the facility of standing instructions for credits to his
account, then such instructions may be given to the DP. Otherwise, he will need to give a
receipt instruction to his DP for receiving credits to his account. 

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2. EVALUATION OF NEW ISSUE APPLICATION FORMS IPO EVALUATION
Introduction
Public issues can be classified into Initial Public Offerings and Further Public Offerings.
In a public offering, the issuer makes an offer for new investors to enter its shareholding family. The
issuer company makes detailed disclosures as per the DIP guidelines in its offer document and offers
it for subscription. Initial Public Offering (IPO) is when an unlisted company makes either a fresh
issue of securities or an offer for sale of its existing securities or both for the first time to the public.
This paves way for listing and trading of the issuer’s securities.
IPO is new shares Offered to the public in the Primary Market .The first time the company is
traded on the stock exchange. A prospectus is issued to read about its risk before investing. IPO is a
company's first sale of stock to the public. Securities offered in an IPO are often, but not always,
those of young, small companies seeking outside equity capital and a public market for their stock.
Investors purchasing stock in IPOs generally must be prepared to accept very large risks for the
possibility of large gains. Sometimes, just before the IPO is launched, Existing share Holders get
very liberal bonus issues as a reward for their faith in risking money when the project was new
How to apply to a Public issue?
When a company floats a public issue or IPO, it prints forms for application to be filled by
the investors. Public issues are open for a few days only. As per law, any public issue should be kept
open for a minimum of 3days and a maximum of 21 days. For issues, which are underwritten by
financial institutions, the offer should be kept open for a minimum of 3 days and a maximum of 21
days.
For issues, which are underwritten by all India financial institutions, the offer should be kept
open for a maximum of 10 days. Generally, issues are kept open for only 3 to 4 days. The duly
complete application from, accompanied by cash, cheque, DD or stock invest should be deposited
before the closing date as per the instruction on the form. IPO's by investment companies (closed end
funds) usually contain underwriting fees which represent a load to buyers.
Before applying for any IPO, analyse the following factors:
1. Who are the Promoters? What is their credibility and track record?

25. 25
2.What is the company manufacturing or providing services - Product, its potential
3.Does the Company have any Technology tie-up? if yes , What is the reputation of the collaborators
4.What has been the past performance of the Company offering the IPO?
5.What is the Project cost, what are the means of financing and profitability projections?
6.What are all the Risk factors involved?
7.Who has appraised the Project? In India Projects apprised by IDBI and ICICI have more credibility
than small Merchant Bankers
How to make payments for IPO?
The payment terms of any IPO or Public issue is fixed by the company keeping in view its
fund requirements and the statutory regulations. In general, companies stipulate that either the entire
money should be paid along with the application or 50 percent of the entire amount be paid along
with the application and rest on allotment. However, if the funds requirements are staggered, the
company may ask for the money in calls, that is, the company demands for the money after allotment
as and when the cash flow demands. As per the statutory requirements, for public issue large than Rs.
250 crore, the money is to be collected as under:
 25 per cent on application 

 25 per cent on allotment 

 50 per cent in two or more calls 
Understanding IPO Grading
IPO grading is a unique concept involving an independent agency that is free from bias and
with the available tools for assessing the investment attractiveness of an equity security. IPO grading
is a service aimed at facilitating the assessment of equity issues offered to the public, says SEBI. IPO
grading can act as an additional decision-making tool for them.
The idea is that IPO grading will help the investor better appreciate the meaning of the
disclosures in the issue documents, collapsing all of the above information into a single digit. Thus,
IPO grading could be seen as an added investment guidance tool seeking to hide the ignorance of the
above factors and still help the investors make an informed decision. Grading of IPOs in terms of
their fundamental quality will enable investors steer clear of unsound offers. IPO grading in general

26. 26
would be a relative assessment of the fundamentals of the equity security by credit rating agencies
registered with SEBI.
But IPO grading is totally unheard of anywhere else and is a First-From-India initiative. The
grading, to be done by the SEBI-registered credit rating agencies, would be applicable to all IPOs for
which offer documents are filed after April 30, SEBI said in a circular. SEBI does not play any role
in the assessment made by the grading agency.
The grading is intended to be an independent and unbiased opinion of that agency. The
company needs to first contact one of the grading agencies and mandate it for the grading exercise.
Though this process will ideally require 2-3 weeks for completion, it may be a good idea for
companies to initiate the grading process about 6-8 weeks before the targeted IPO date to provide
sufficient time for any contingencies. IPO grading is a service aimed at facilitating the assessment of
equity issues offered to the public, says SEBI.
“IPO grading is the grade assigned by a Credit Rating Agency registered with SEBI, to the initial
public offering (IPO) of equity shares or any other security which may be converted into or
exchanged with equity shares at a later date”
3. IPO RISK FACTORS
RISK FACTORS
An investment in Equity Shares involves a high degree of risk. The risks and uncertainties
described in this section are not the only risks that the company currently faces. Additional risks and
uncertainties not presently known to us or that we currently believe to be immaterial may also have

27. 27
an adverse effect on this business, results of operations and financial condition. If any of the
following risks, or other risks that are not currently known or are now deemed immaterial, actually
occur, adani business, results of operations and financial condition could suffer, the price of this
Equity Shares could decline, and investor may lose all or part of the investor investment.
The financial and other related implications of risks concerned, wherever quantifiable, have
been disclosed in the risk factors mentioned below. However, there are risk factors where the effect
is not quantifiable and hence has not been disclosed in such risk factors.
The numbering of the risk factors has been done to facilitate the ease of reading and
reference, and does not in any manner indicate the importance of one risk factor over another. In
making an investment decision, prospective investors must rely on their own examination of the
Company and the terms of the Issue, including the merits and risks involved.
Unless otherwise stated, the financial information of the Company used in this section is
derived from our audited consolidated financial statements under Indian GAAP, as restated.
4. SCREEN BASED TRADING-NEAT, BOLT AND ODIN
NSE ARCHITECTURE – NEAT
NSE has deployed NIBIS (NSE's Internet Based Information System) for real-time
dissemination of trading information over the Internet and NEAT a client-server-based application to
help its operations.
NEAT (National Exchange for Automated Trading) stores all trading information in an in-
memory database at the server end to achieve minimum response time and maximum system
availability for users. The trading server software runs on a fault-tolerant STRATUS mainframe and
the client software runs on Windows PCs.The telecommunications network uses the X.25 protocol
and is the backbone of the automated trading system. Each trading member trades on the NSE with

28. 28
other members through a PC located in the trading member's office.
The trading members on the Wholesale Debt Market segment are linked to the central
computer at the NSE through dedicated 64 Kbps leased lines and VSAT terminals. These leased lines
are multiplexed using dedicated 2 MB optical-fiber links. The WDM participants connect to the
trading system through dial-up links.
The exchange uses RISC-based UNIX servers from Digital and HP for back office
processing. Applications like Oracle 7 and SQL/Oracle Forms 4.5 front ends are used for the
exchange functions.
BSE ARCHITECTURE – BOLT
BSE has deployed an Online Trading system (BOLT) on March 14, 1995. It works on a
Tandem S74016 platform running on 16 CPUs. The Tandem Himalaya S74016 machines act as the
backend to more than 8000 Trader Workstations networked on Ethernet, VSAT and Managed Leased
Data Network (MLDN). The systems claim to handle up to two million trades a day.
BOLT has a two-tier architecture. The trader workstations are connected directly to the
backend server which acts as a communication server and a Central Trading Engine (CTE). Other
services like information dissemination, index computation, and position monitoring are also
provided by the system. A transaction monitoring facility in the Tandem architecture helps keep data
integrity through non-stop SQL.

29. 29
With the help of MTNL, BSE has setup a MLDN Network comprising 300 2 Mbps lines
and 1500 64 Kbps lines which connect all regional stock exchanges and offices in Mumbai.
Access to market related information through the trader workstations is essential for the market
participants to act on real-time basis and take instantaneous decisions. BOLT has been interfaced
with various information vendors like Bloomberg, Bridge, and Reuters. Market information is fed
to news agencies in real time. The exchange plans to enhance the capabilities further to have an
integrated two-way information flow.
'BSE On-Line Trading System’ (BOLT) has been awarded the globally recognized
the
Information Security Management System standard BS7799-2:2002.
ODIN - OPEN DEALER INTEGRATED NETWORK
ODIN™ - the Multi-Exchange, Multi-Currency Front Office trading and risk management
system - makes trading on multiple markets easier through the use of a single application. It
incorporates appealing features and works on advanced technology which facilitates higher
accessibility, ensuring speedy performance and advanced risk management.
ODIN™ Trader Work Station (TWS) is the trading front-end for the brokers. The broker
can view an integrated Market Watch allowing him to view and trade on more than one market on
the same screen.
Features
 Sophisticated trading front-end with Microsoft Excel compatibility 

 Offers alerts and basket trading features 

 Allows multiple portfolio creation, customizable preferences like font, layout, color, columns,
etc. 

 Offers real time integrated order and trade book. 

 Provides integrated view of mark-to-market profits & losses, net positions and exposures 

 Advanced trading strategies tool for capturing finest profit making opportunities 
ODIN™ ADMINISTRATOR
Defines organization structure by setting up groups, branches, dealers and clients
Creates multiple administrators for role segregation as well as permit ease of monitoring

30. 30
Defines various limits with alerts for each type of user and the end clients
Defines risk views, risk scenarios and real-time update on risk at organization level and at each user
level Features panic withdrawal to cancel or close out all/selected outstanding orders in one click
ODIN™ Connect
ODIN™ Connect acts as a bridge between a client application, which could be an OMS
or a direct trading workstation, and a Stock Exchange’s Central Trading Engine. It provides a
higher level of abstraction over the exchange message structures to offer a uniform interface for a
client application to communicate with the Stock Exchange.
ODIN
TM
– DIET
Overview
ODIN™ Diet is a high-end, integrated trading application for active retail traders. It
works on an advanced technology algorithm. This facilitates higher accessibility and availability,
ensuring any where any time trading and delivers speedy performance on very low bandwidth
requirement. As the name suggest ODIN™ Diet works on the principle of high optimization of
the hardware and network requirements at the end-trader level.
ODIN™ Diet is a new generation, easy to access client level trading application. It
provides streaming quotes on a real-time basis and an ability to transmit buy/sell order requests
directly to the exchange. Existing ODIN™ users can provide this ‘direct trading facility' to their
clients without investing much on hardware or network. ODIN™ Diet application can easily
interface with the existing ODIN™ Server Setup.
ODIN™ Diet is capable of functioning on heterogeneous network platforms and ensures
high performance & scalability whereby facilitating anywhere any time trading environment. It is
user-friendly in the sense that the size of the application is shrink-wrapped to ease the distribution
and availability of the trading front-end.
Features
The self-installing kit of ODIN™ Diet is easy to deploy. It can be put on the Broker’s website to
allow client/s to download, install and trade anytime from any computer. For optimum utilization
of bandwidth ODIN™ Diet provides real-time streaming information for scrips set-up in the portfolio
thus optimizing the bandwidth utilization.

31. 31
Integrated Market Watch provides a view with real-time streaming information from the
exchange Central Trading Engine for all the markets i.e.Equities, Derivatives and Commodities.
Ability to configure column profile makes it easier to view and navigate across columns.
Market Snap Shot provides the Best Buy / Sell price, Volume in Quantity and Value, day’s
Open, High, Low and Close prices for every individual scrips/contracts.
Best Five Orders Real-Time Market Information of securities & contracts, displaying the
market depth. Portfolio Portfolio is a selected set of scrips/ contracts logically grouped, as per the
requirements of the user. The portfolio can then be applied to views such as the Market Watch or the
Ticker. The user can create multiple portfolios and switch from one portfolio to another anytime.
The user can create a dynamic portfolio in Futures and options. This feature allows the user to
create a portfolio for Futures or Options based on Available/Current month, with strike prices based
on In/Out/At the Money. Thus on every expiry date/month the user is not required to create a new
portfolio for new maturities being introduced.
Order entry screen with minimum required inputs from user for quick creation and execution
of orders. Order and Trade confirmations are transmitted to the trader workstation in real-time,
thereby eliminating the need to query the server for order and trade information. Using the
comprehensive filters, the user can customize the order / trade book. The Order status is displayed in
the order book
e.g. pending at the exchange, executed, cancelled, pending administrator approval, amongst others.
Pending orders in the order book can be modified or cancelled.
Integrated Net Position and Exposures
A view to track the clients net-position either contract or security-wise. Further this provides
an aggregate view of exposures and maintains not only daily position but also expiry. Multi scrip
graphing facility, graph for comparison in F&O with the underlying. Intraday charting with pan,
zoom facility for scrips and index. Charting options with trend lines, mounts, cross, dots. Time
coordinates on graph with values.

32. 32
The data window displays the data on which the graph is plotted.. Intraday data plotted on the
graph can be viewed in the data window.. The data can be viewed either on value or on volume. Data
can also be saved to file for future records.
The tick watch window displays the tick-by-tick movement in any scrip. This enables the user
to make more informed buy/sell decision based on the information. Data can be saved to file. The
facility of filter watch allows the user to set filters/alerts. The filters can be set for Volume, Price,
Quantity, Change in price % as and when any scrip satisfies the criteria it will appear in the filter
Benefits
 Helps in leveraging business expertise for growth 

 Trading facility available at marginal cost 

 Common screen for multiple exchange segment 

 User definable fully customizable views at all levels 

 Single interface for Multi Tier Risk Management across Multi-Exchange segments with user defined
periodicity 

 Online integration with the bank & depository to monitor and control clients 

 Provides safety against uncertain volatility of market 

 Real time streaming quote of multi exchanges/segments 

 Stability / Robustness 

 Scalability 

 Business Expansion 

 Risk Management 

 Performance 

33. 33
5. STUDY OF VARIOUS ORDER TYPES AND ORDER BOOKING
ORDER TYPES
An Order is an instruction to a broker/dealer to buy, sell, deliver, or receive financial
instruments or commodities which commits the issuer of the "order" to the terms specified.
Indication, inquiry, bid wanted, offer wanted.
Basically, two types of share transaction exist- buy orders and sell orders. Technically sell
orders can be further classified as either selling long or selling short. Various types of orders that you
can put through to exchanges are as follows:
Buy Orders
Buy orders, obviously are used when the investor anticipates a rise in prices. When he deems
the time appropriate for the share purchase, the investor enters a buy order.
Sell Orders
A brokerage order is to sell a specified amount of a security.
Sell – Long Orders
When the investor determines that a stock he already owns (i.e. long position) is going to
experience a decline in price, he may decide to dispose of it. Here also, other determinations must be
made to accompany sell order.
Sell-Short Orders
Short selling, or "going short," is a special and quite speculative variety of selling. Basically it
involves selling shares of a stock that are not owned in the anticipation of a price decline. The short
seller sells a stock in the first leg of transaction, which is neutralized by eventual purchase of sold
position at a lower market price. The short seller makes profit/loss by the difference between the sale
price and the purchased price. However, short selling can be very dangerous since every rise in price
of stock would add to losses of the short-seller, the stock may never reach the lower price (the price
of short sell) for a long time and booking losses would be the only solution for short-seller. Sell-short
transaction, by its very nature leads to unlimited losses till the transaction is neutralized. In the case
of a buy into a stock at least the investor acquires stake in the company whose performance may
eventually get reflected in the share price and provide exit to the buyer. Sell-short transactions are

34. 34
hence executed by experienced participants who follow markets and company performances on a
daily basis.
Price Limit Orders:
Market Order:
Investors, who want to buy or sell the share regardless of price on that day. They are executed
as fast as possible at the best prevailing price on the exchange. It means that your order quantity will
be executed the moment it reaches the exchange provided the required quantity is available. This
order type is accepted by both the exchanges i.e. BSE and NSE. The obvious advantage of a market
order is the speed with which it is executed. The disadvantage is that the investor does not know the
exact execution price until after the execution. This advantage is potentially most troublesome when
dealing in either very inactive or very volatile securities.
Limit orders
Limit type orders refer to a buy or sell order with a limit price. Limit orders overcome the
disadvantage of the market order-namely, not knowing in advance the price at which the transaction
will take place. It means that if the order gets executed, them it will within the limit specified or at a
better rate than that. This order type is accepted by both the exchanges i.e. BSE and NSE.
When using a limit order, the investor specifies in advance the limit price at which he wants
the transaction to be carried out. It is always understood that the price limitation includes an "or
better" instruction. In the case of a limit order to buy, the investor specifies the maximum price he
will pay for the share; the order can be carried out only at the limit price or lower. In the case of a
limit order to sell, the investor specifies the minimum price he will accept for the share; the order can
be carried out only at the limit price or higher
Use of Market and limit orders:
To safe guard against extreme volatility in the markets, you can put a limit on what price you
would want your order to execute. Generally, limit orders are placed "away from the market." This
means that the limit price is somewhat removed from the prevailing price (generally, above the
prevailing price in the case of a limit order to sell, and below the prevailing price in the case of a
limit order to buy). Obviously, the investor operating in this manner believes that his limit price will

35. 35
be reached and executed in a reasonable period of time. Therein, however, lies the chief disadvantage
of a limit order-i.e. it may never be executed at all. If the limit price is set very close to the prevailing
price, there is little advantage over the market order. Moreover, if the limit is considerably removed
from the market, the price may never reach the limit – even because of a fractional difference. Also
because limit orders are filled on a first come first basis, it is possible that so many of them are in
ahead of the investor’s limit at a given price that his order will never be executed. Thus, selecting a
proper limit price is a delicate maneuver.
On the other hand a market order is filled at the best possible price as soon as an investor
places the order and it will not be even possible to cancel the order. However, a limit order may be
cancelled or modified at any time prior to execution.
Time limit of Orders:
Day Orders or End of Day Orders
A day order is one that remains active only for the normal trading time on that day. Unless
otherwise requested by the investor, all orders are treated as day orders only. Market orders are
almost day orders because they do not specify a particular price. One key rationale for the day order
is that market conditions might change overnight, and thus a seemingly good investment decision one
day might seem considerably less desirable the following day.
Good Till Cancel Order
A Good Till Cancelled (GTC) order remains in the system until they are executed or
cancelled. These types of orders are used in conjunction with limit orders. However, the system
cancels this order if it is not traded within a number of days, which is parameterized by the
Exchange. In the case of BSE and NSE, such order expires at the end of settlement in which it was
placed.
When using a GTC order, the investor is implying that he understands the market mechanics,
and therefore feels sufficiently confident that, given enough time, the order will be executed at the
limit price.
Good Till Date Order
A Good Till Days/Date (GTD) order allows you to specify the number of days/date till which
the order should stay in the system if not executed. The days counted are inclusive of the day/date on
which the order is placed and inclusive of holidays. Such orders are automatically cancelled at the

36. 36
end of settlement in case strike-price is not reached during the tenure of settlement in which the order
was placed. The investor would then have to refresh the order with his broker, in the subsequent new
settlement.
Immediate or Cancel Order
An Immediate or Cancel (IOC) order allows the user to buy or sell a security as soon as the
order is released into the system, failing which the order is cancelled from the system. Partial match
is possible for the order and the unmatched portion of the order is cancelled immediately. NSE uses
the same terminology while BSE calls it Hit BUY/SELL.
SPECIAL TYPES OF ORDERS:
Stop Loss Order:
A stop loss order allows investor to place an order, which gets activated only when the last
traded price of the share is reached or crosses a predefined threshold price also called as trigger price.
It means that if investor feels that any particular share will be worth buy or sell only after it crosses
some threshold rate then this type of order gets activated. Several possible dangers are inherent when
using this type of order. First, if the stop is placed too close to the market, the investor might have his
position closed out because of a minor price fluctuation, even though his idea will prove correct in
the long run. On the order hand, if the stop is too far away from the market, the stop order serves no
purpose. Further classification of this type of orders can be defined depending upon the price limit of
orders, i.e. the price on which the order should execute, as explained under:
Stop Loss Market Orders
A stop order is a special type of limit order but with very important differences in intent and
application. A stop market order to sell is treated as a market order when the stop price or a price
below is "touched" (reached); a stop market order to buy is treated as a market order when the stop
price or a price above it is reached. Thus, stop market order to sell is set at a price below the current
market price, and a stop order to buy is set at a price above the current market price.
The possible inherent danger associated with this type of order is that because they become
market orders after the proper price level has been reached, the actual transaction could take place

37. 37
some distance away from the price the investor had in mind when he placed the order. The reason
may be prior queuing up of other orders or order quantity not available.
Stop Loss Limit Orders
The stop limit order is a device to overcome the uncertainties connected with a stop market
order – namely that of not knowing what the execution price will be after the order becomes a market
order. The stop limit order gives the investor the advantage of specifying the limit price: the
maximum price on which the buy order should filled or minimum price on which the sell order
should filled. Therefore, a stop limit order to buy is activated as soon as the stop price or higher is
reached, and then an attempt is made to buy at the limit price or lower. Conversely, a stop limit order
to sell is activated as soon as the stop price or lower is reached, and then an attempt is made to sell at
the limit price or higher. The obvious danger is that the order may not be executed in a volatile
market because the difference between execution limit and stop price may be too low. However, if
things work out as planned, the stop limit order to sell will be very effective.
Disclosed Quantity (DQ) order
The system provides a facility for entering orders with quantity conditions: DQ order allows
you to disclose only a part of the order quantity to the market.
Price Bands
Also known as circuit filters or circuit breakers, price bands set the upper and lower limit
within which a stock can fluctuate on any given day. A price band for the day is a function of
previous trading day’s closing. Currently the both BSE and NSE have fixed price bands for different
securities within which they can move within a day. Pursuant to a SEBI directive effective from July
03, 2000 the Exchanges decided that the price bands in respect of all the securities shall be relaxed by
8% after the security has touched the initial price band of 8%. However, for securities traded at or
above Rs.10 and below Rs.20 will have daily price band of +/-25% without any settlement / weekly
price band and for securities traded below Rs.10/- will have daily price band of +/- 50% without any
other settlement price band. The utility of price bands is that they are supposed to prevent extreme
price movements, thus reducing the scope of price manipulation. In a way price bands do slow things
down and make it that much harder for operators wanting to quickly manipulate prices in huge leaps.
When there is general euphoria or panic in the market that seems fundamentally unwarranted, price

38. 38
bands give wary investors the benefit of a cooling period. Operators with access to large funds,
shares and time at their disposal, however can manipulate the price bands to their advantage by
blocking exit/entry of other investors from a particular counter by placing huge orders.
Example
For example when a stock touches the lower circuit in a sharp downtrend, ordinary buyers
would wait for the next trading session believing that the stock will be available at a still lower price.
As a result, investors wanting to sell the stock won’t find buyers at the lower circuit price but would
have to offload at a much lower price due to the volume-led manipulation executed by operator. The
operator would thus be able to batter the stock down by a large gap created by his own sell order.

39. 39
6. TRADING AND SETTLEMENT ACTIVITIES
Introduction
The trading on stock exchanges in India used to take place through open outcry without use
of information technology for immediate matching or recording of trades. This was time consuming
and inefficient. This imposed limits on trading volumes and efficiency. In order to provide
efficiency, liquidity and transparency, NSE introduced a nation-wide on-line fully automated screen
based trading system (SBTS) where a member can punch into the computer quantities of securities
and the prices at which he likes to transact and the transaction is executed as soon as it finds a
matching sale or buy order from a counter party. SBTS electronically matches orders on a strict
price/time priority and hence cuts down on time, cost and risk of error, as well as on fraud resulting
in improved operational efficiency.
It allows faster incorporation of price sensitive information into prevailing prices, thus
increasing the informational efficiency of markets. It enables market participants, irrespective of their
geographical locations, to trade with one another simultaneously, improving the depth and liquidity
of the market. It provides full anonymity by accepting orders, big or small, from members without
revealing their identity, thus providing equal access to everybody. It also provides a perfect audit
trail, which helps to resolve disputes by logging in the trade execution process in entirety. This
sucked liquidity from other exchanges and in the very first year of its operation, NSE became the
leading stock exchange in the country, impacting the fortunes of other exchanges and forcing them to
adopt SBTS also. Today India can boast that almost 100% trading take place through electronic order
matching.
Technology was used to carry the trading platform from the trading hall of stock exchanges to
the premises of brokers. NSE carried the trading platform further to the PCs at the residence of
investors through the Internet and to handheld devices through WAP for convenience of mobile
investors. This made a huge difference in terms of equal access to investors in a geographically vast
country like India.
The trading network is depicted in Figure 1.1. NSE has main computer which is connected
through Very Small Aperture Terminal (VSAT) installed at its office. The main computer runs on a
fault tolerant STRATUS mainframe computer at the Exchange. Brokers have terminals (identified as

40. 40
the PCs in the Figure 1.1) installed at their premises which are connected through VSATs/leased
lines/modems.
An investor informs a broker to place an order on his behalf. The broker enters the order
through his PC, which runs under Windows NT and sends signal to the Satellite via VSAT/leased
line/modem. The signal is directed to mainframe computer at NSE via VSAT at NSE's office. A
message relating to the order activity is broadcast to the respective member. The order confirmation
message is immediately displayed on the PC of the broker. This order matches with the existing
passive order(s), otherwise it waits for the active orders to enter the system. On order matching, a
message is broadcast to the respective member.
The trading system operates on a strict price time priority. All orders received on the system
are sorted with the best priced order getting the first priority for matching i.e., the best buy orders
match with the best sell order. Similar priced orders are sorted on time priority basis, i.e. the one that
came in early gets priority over the later one. Orders are matched automatically by the computer
keeping the system transparent, objective and fair. Where an order does not find a match, it remains
in the system and is displayed to the Whole market, till a fresh order comes in or the earlier order is
cancelled or modified.
The trading system provides tremendous flexibility to the users in terms of kinds of orders
that can be placed on the system. Several time - related (immediate or cancel), price-related (buy/sell

41. 41
limit and stop loss orders) or volume related (Disclosed Quantity) conditions can be easily built into
an order. The trading system also provides complete market information on-line. The market screens
at any point of time provide complete information on total order depth in a security, the five best
buys and sells available in the market, the quantity traded during the day in that security, the high and
the low, the last traded price, etc. Investors can also know the fate of the orders almost as soon as
they are placed with the trading members. Thus the NEAT system provides an Open Electronic
Consolidated Limit Order Book (OECLOB).
Limit orders are orders to buy or sell shares at a stated quantity and stated price. If the price
quantity conditions do not match, the limit order will not be executed. The term ‘limit order book’
refers to the fact that only limit orders are stored in the book and all market orders are crossed against
the limit orders sitting in the book. Since the order book is visible to all market participants, it is
termed as an ‘Open Book’.

42. 42
7. PREPARATION OF TECHNICAL CHARTS
TECHNICAL ANALYSIS
Fundamental and technical analyses are the 2 basic techniques used to analyze securities in
the stock market. Technical analysis is a mathematical approach to predict stock price movements
based on historical price and volume data. Usually stock charts are combined with the analytical data
to interpret technical indicators in a graphical format.
Technical analysis does not consider company fundamentals such as earnings, PE (Price to
Earnings Ratio), EBITDA, cash, debt, dividends, insider transactions, take-over’s, bankruptcy’s,
etc.Many professional securities traders recommend that aspiring traders use both fundamental and
technical analysis.
Interpreting stock charts
Bar Chart
A method of displaying the open, high, low and close prices for a financial instrument for a
specific period.
Bar charts use single, vertical bars to illustrate a stock's price range and opening/closing
prices for a designated time period. The bars may illustrate daily, weekly, or monthly periods. For
example on a weekly chart, each bar represents one week and on a daily chart, each bar represents
one day.
The top of the bar indicates the stock's highest price of the period. The bottom of the bar
represents the stock's lowest price for that period. The small perpendicular bar on the left designates
the stock's opening price. The one on the right shows the stock's closing price.
Candle stick chart
A charting method used to display open, high, low and close prices for a security,
Candlesticks were invented by a 17th century Japanese rice broker, Munehisa Homma, who was one
of the first Japanese traders to use price history to predict future prices. His trading theories and
principles evolved into the candlestick charting techniques used today.

43. 43
A candlestick uses the top and bottom of its bar to indicate high and low prices of the time
frame indicated. The bar is referred to as a "real body" and connects the opening and closing prices.
The real body shows the opening and closing prices with a clear, or a dark, rectangle. When the
rectangle or real body is clear, it means that the stock closed above its opening price. When the real
body is dark, it means that the stock closed below its opening price. The bar that extends above and
below the real body is called the upper shadow and lower shadow respectively.
Another major component of stock charts is the volume data. This data is usually shown in
bar graph format below the price chart
Line Chart
The most basic of the four charts is the line chart because it represents only the closing prices over a
set period of time. The line is formed by connecting the closing prices over the time frame. Line
charts do not provide visual information of the trading range for the individual points such as the
high, low and opening prices. However, the closing price is often considered to be the most
important price in stock data compared to the high and low for the day and this is why it is the only
value used in line charts.

44. 44
Head & Shoulders chart
The Head and Shoulders bottom is a popular pattern with investors. This pattern marks a
reversal of a downward trend in a financial instrument's price.
Volume is absolutely crucial to a Head and Shoulders Bottom. An investor will be looking for
increasing volumes at the point of breakout. This increased volume definitively marks the end of the
pattern and the reversal of a downward trend in the price of a stock.
A perfect example of the Head and Shoulders Bottom has three sharp low points created by
three successive reactions in the price of the financial instrument. It is essential that this pattern form
following a major downtrend in the financial instrument's price.
The first point - the left shoulder - occurs as the price of the financial instrument in a falling
market hits a new low and then rises in a minor recovery. The second point - the head happens when
prices fall from the high of the left shoulder to an even lower level and then rise again. The third
point - the right shoulder - occurs when prices fall again but don't hit the low of the head. Prices then
rise again once they have hit the low of the right shoulder. The lows of the shoulders are definitely
higher than that of the head and, in a classic formation, are often roughly equal to one another.
The neckline is a key element of this pattern. The neckline is formed by drawing a line
connecting the two high price points of the formation. The first high point occurs at the end of the
left shoulder and beginning of the downtrend to the head. The second marks the end of the head and
the beginning of the downturn to the right shoulder. The neckline usually points down in a Head and
Shoulders Bottom, but on rare occasions can slope up.
The pattern is complete when the resistance marked by the neckline is "broken". This occurs
when the price of the stock, rising from the low point of the right shoulder moves up through the
neckline. Many technical analysts only consider the neckline "broken" if the stock closes above the
neckline.

45. 45
The volume sequence should progress beginning with relatively heavy volume as prices
descend to form the low point of the left shoulder. Once again, volume spikes as the stock hits
a new low to form the point of the head. It is possible that volume at the head may be slightly
lower than at the left shoulder. When the right shoulder is forming, however, volume should be
markedly lighter as the price of the stock once again moves lower.
It is most important to watch volume at the point where the neckline is broken. For a
true reversal, experts agree that heavy volume is essential.
Technical indicators
Technical indicators are mathematical parameters that are constructed by intelligent
design with the intent to be used as tools to predict stock prices. The indicators are constructed
using stock price and volume data. View or create technical indicators at our example technical
indicators page. One signal market technicians look for is a divergence between certain
indicators and the price action of a stock. A positive divergence (classic buy signal) exists
when the price action of a stock is going down while the indicator is simultaneously becoming
more bullish. A negative divergence is the opposite of a positive divergence.
There are hundreds of well known technical indicators. Well known technical indicators
such as RSI (Relative Strength Index), Stochastics, Moving Average Cross-overs, MACD were
all contructed by humans. AiStockCharts.com goes far beyond relying on humans to construct
new intelligent technical indicators. Every day the AI (Artifical Intelligence) programs run at
AiStockCharts.com to find new and historically profitable technical indicators. Only the
strongest daily top stock picks are automatically entered into the AI StockCharts trading log as
open positions. Unlike other trading systems that set arbitrary entry and exit points,
AistockCharts.com sets exit prices including stop losses that are calculated based on the history
of the individual stock. Subscribers can lookup the historical performance of all technical
indicators. Some traders may be surprised to find some well known technical indicators have
worked well while others have not.
Hypothetical performance results have many inherent limitations, some of which are
described below. No representation is being made that any account will or is likely to achieve
profits or losses similar to those shown. In fact, there are frequently sharp differences between
hypothetical performance results and the actual results subsequently achieved by any particular

46. 46
trading system. One of the limitations of hypothetical performance results is that they are
generally prepared with the
benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no
hypothetical trading record can completely account for the impact of financial risk in actual
trading. For example, the ability to withstand losses or to adhere to a particular trading program
in spite of trading losses are material points which can also adversely affect actual trading
results. There are numerous other factors related to the markets in general or to the
implementation of any specific trading program which cannot be fully accounted for in the
preparation of hypothetical performance results and all of which can adversely affect actual
trading results. The risk of loss in trading stocks can be substantial.
The figure below displays the relationship between stock price and volume data, basic
chart analysis, technical indicators, chart patterns and technical analysis systems.
RSI (Relative Strength Index)
Relative Strength Index (RSI) is an oscillator that measures a particular stock's current
relative strength compared to its own price history. The RSI is plotted on a vertical scale
numbered from 0 to 100. A security is considered to be oversold when it falls below 30 and

47. 47
overbought when it rises over 70.
Moving Average Convergence/Divergence (MACD) Oscillator Chart Pattern
Implication
When the MACD crosses the signal line or the zero line (the event), a bullish or bearish
signal is generated depending on the direction of the crossovers.
Description
The MACD, "Moving Average Convergence/Divergence", shows the relationship
between two moving averages of prices. The MACD is the difference between a 26-day and
12-day exponential moving average. A 9-day exponential moving average called the "signal
line" is plotted on top of the MACD to show bullish and bearish signal points. A bullish signal
is generated when the MACD rises above the signal line, or above zero. A bearish signal occurs
when the MACD falls below the signal line or below zero.
Trading Considerations
The MACD is best used in strongly trending markets. The MACD indicates overbought
and oversold conditions. An overbought situation occurs when prices have risen too far too fast
and are ready for a downward correction. An oversold situation occurs when prices have fallen
too far too fast and are ready for an upward correction. When the shorter moving average pulls
away from the longer moving average (i.e., the MACD rises), it is likely that the financial
instrument's price is too high and will soon return to more realistic levels.
An indication that an end to the current trend may be near occurs when the MACD
diverges from the financial instrument's price. A bearish divergence occurs when the MACD is
making new lows while prices fail to reach new lows. A bullish divergence occurs when the
MACD is making new highs while prices fail to reach new highs. Both of these divergences are
most significant when they occur at relatively overbought/oversold levels.

48. 48
Bollinger Bands Oscillator
When the price crosses one of the Bollinger band (upper or lower), a bullish or bearish
event is generated depending on the direction of the crossovers.
Bollinger bands use standard deviation and a moving average to help traders determine buy and
sell events, or to help confirm other patterns. A price chart that uses Bollinger bands displays
four lines; price, the upper and lower Bollinger bands, and the moving average.
The upper and lower Bollinger bands typically appear 2 standard deviations above and
below the 20-day moving average. Recognia supports these typical settings.
Price tends to bounce between the upper and lower Bollinger bands. The width between
the bands does not remain constant. Typically, the expansion or contraction of the bands
indicates periods of high or low volatility.
Trend analysis:
Trend is really nothing more than the general direction in which a security or market is
headed.
Types of trends:
Trends can be classified broadly in 3 types. They are:
a) Uptrend: - Generally a stock moves in any direction with phases of consolidation or moving
against the trend for a short period. But still it creates a higher Highs and Lows in case of an
uptrend. In short each short rally will create new High for the stock.
b) Downward: - In this case as against Uptrend the stock creates lower Highs and Lows.
Furthermore in case of Downtrend the fall is much steeper than the rise in case of Uptrend.
c) Range-bound: - In case of such a trend the price moves in a small range for the long period.
There is no apparent direction as far as trend is concerned in this case.
Trend Lengths
Along with these three trend directions, there are three trend classifications. A trend of
any direction can be classified as a long-term trend, intermediate trend or a short-term trend. In
terms of the stock market, a major trend is generally categorized as one lasting longer than a

49. 49
year. An intermediate trend is considered to last between one and three months and a near-term
trend is anything less than a month. A long-term trend is composed of several intermediate
trends, which often move against the direction of the major trend. If the major trend is upward
and there is a downward correction in price movement followed by a continuation of the
uptrend, the correction is considered to be an intermediate trend.
When analyzing trends, it is important that the chart is constructed to best reflect the
type of trend being analyzed. To help identify long-term trends, weekly charts or daily charts
spanning a five-year period are used by chartists to get a better idea of the long-term trend.
Daily data charts are best used when analyzing both intermediate and short-term trends.
Trendlines
A trendline is a simple charting technique that adds a line to a chart to represent the
trend in the market or a stock. Drawing a trendline is as simple as drawing a straight line that
follows a general trend. These lines are used to clearly show the trend and are also used in the
identification of trend reversals.
As seen in the above figure, an upward trendline is drawn at the lows of an upward
trend. This line represents the support the stock has every time it moves from a high to a low.
Notice how the price is propped up by this support. This type of trendline helps traders to
anticipate the point at which a stock's price will begin moving upwards again. Similarly, a
downward trendline is drawn at the highs of the downward trend. This line represents the
resistance level that a stock faces every time the price moves from a low to a high.

50. 50
Chart Patterns
A chart pattern is a distinct formation on a stock chart that creates a trading signal, or a
sign of future price movements. Chartists use these patterns to identify current trends and trend
reversals and to trigger buy and sell signals.
There are two types of patterns within this area of technical analysis, reversal and continuation.
A reversal pattern signals that a prior trend will reverse upon completion of the pattern. A
continuation pattern, on the other hand, signals that a trend will continue once the pattern is
complete. These patterns can be found over charts of any timeframe. In this section, we will
review some of the more popular chart patterns.
Head and Shoulders
This is one of the most popular and reliable chart patterns in technical analysis. Head
and shoulders is a reversal chart pattern that when formed, signals that the security is likely to
move against the previous trend. As you can see in Figure, there are two versions of the head
and shoulders chart pattern. Head and shoulders top (shown on the left) is a chart pattern that is
formed at the high of an upward movement and signals that the upward trend is about to end.
Head and shoulders bottom, also known as inverse head and shoulders (shown on the right) is
the lesser known of the two, but is used to signal a reversal in a downtrend.

51. 51
Both of these head and shoulders patterns are similar in that there are four main parts:
two shoulders, a head and a neckline. Also, each individual head and shoulder is comprised of
a high and a low. For example, in the head and shoulders top image shown on the left side in
Figure, the left shoulder is made up of a high followed by a low. In this pattern, the neckline is
a level of support or resistance. Remember that an upward trend is a period of successive rising
highs and rising lows. The head and shoulders chart pattern, therefore, illustrates a weakening
in a trend by showing the deterioration in the successive movements of the highs and lows.
We have finished our look at some of the more popular chart patterns. You should now
be able to recognize each chart pattern as well the signal it can form for chartists. We will now
move on to other technical techniques and examine how they are used by technical traders to
gauge price movements.
Charting terms and indicators
Concepts
 Average true range - averaged daily trading range 

 Coppock - Edwin Coppock developed the Coppock Indicator with one sole
purpose: to identify the commencement of bull markets 

 Dead cat bounce - the phenomenon whereby a spectacular decline in the price of a
stock is immediately followed by a moderate and temporary rise before resuming
its downward movement 

 Elliott wave principle and the golden ratio to calculate successive price
movements and retracements 

 Hikkake Pattern - pattern for identifying reversals and continuations 

 Momentum - the rate of price change 
Overlays
 Overlays are generally superimposed over the main price chart. 

52. 52

 Resistance - an area that brings on increased selling 

 Support - an area that brings on increased buying 

 Breakout - when a price passes through and stays above an area of support or resistance 

 Trend line - a sloping line of support or resistance 

 Channel - a pair of parallel trend lines 

 Moving average - lags behind the price action but filters out short term movements 

 Bollinger bands - a range of price volatility 

 Pivot point - derived by calculating the numerical average of a particular currency's or
stock's high, low and closing prices 

 Price-based indicators 

 These indicators are generally shown below or above the main price chart. 

 Accumulation/distribution index—based on the close within the day's range 

 Average Directional Index — a widely used indicator of trend strength 

 Commodity Channel Index - identifies cyclical trends 

 MACD - moving average convergence/divergence 

 Parabolic SAR - Wilder's trailing stop based on prices tending to stay within a parabolic
curve during a strong trend 

 Relative Strength Index (RSI) - oscillator showing price strength 

 Rahul Mohindar Oscillator - a trend indentifying indicator 

 Stochastic oscillator, close position within recent trading range 

 Trix - an oscillator showing the slope of a triple-smoothed exponential moving average,
developed in the 1980s by Jack Hutson 

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8. FUNDAMENTAL ANALYSIS OF A COMPANY
Introduction
Investing, like most other things, requires that you have a general philosophy about how to do
things in order to avoid careless errors.
Fundamental Analysis - Buying a Business (Value, Growth, Income, GARP, Quality)
Many people rightly believe that when you buy a share of stock you are buying a proportional
share in a business. As a consequence, to figure out how much the stock is worth, you should
determine how much the business is worth. Investors generally do this by assessing the company's
financials in terms of per-share values in order to calculate how much the proportional share of the
business is worth. This is known as "fundamental" analysis by some, and most who use it view it as
the only kind of rational stock analysis.
Although analyzing a business might seem like a straightforward activity, there are many
flavors of fundamental analysis. Investors often create oppositions and subcategories in order to
better understand their specific investing philosophy. In the end, most investors come up with an
approach that is a blend of a number of different approaches. Many of the distinctions are more
academic inventions than actual practical differences. For instance, value and growth have been
codified by economists who study the stock market even though market practitioners do not find
these labels to be quite as useful. In the following descriptions, we will focus on what most investors
mean when they use these labels, although you always have to be careful to double-check what
someone using them really means.
Value
The goal of the value investor is to purchase companies at a large discount to their intrinsic
value - what the business would be worth if it were sold tomorrow. In a sense, all investors are
"value" investors - they want to buy a stock that is worth more than what they paid. Typically those
who describe themselves as value investors are focused on the liquidation value of a company, or
what it might be worth if all of its assets were sold tomorrow. However, value can be a very
confusing label as the idea of intrinsic value is not specifically limited to the notion of liquidation
value. Novices should understand that although most value investors believe in certain things, not all
who use the word "value" mean the same thing.

54. 54
These value investors tend to have very strict, absolute rules governing how they
purchase a company's stock. These rules are usually based on relationships between the current
market price of the company and certain business fundamentals. Some examples include:
 Price/earnings ratios (P/E) below a certain absolute limit 

 Dividend yields above a certain absolute limit 

 Book value per share at a certain level relative to the share price 

 Total sales at a certain level relative to the company's market capitalization, or market value 
Growth
Growth investing is the idea that you should buy stock in companies whose potential for
growth in sales and earnings is excellent. Growth investors tend to focus more on the company's
value as an ongoing concern. Many plan to hold these stocks for long periods of time, although
this is not always the case. At a certain point, "growth" as a label is as dysfunctional as "value,"
given that very few people want to buy companies that are not growing.
Growth investors look at the underlying quality of the business and the rate at which it is
growing in order to analyze whether to buy it. Excited by new companies, new industries, and
new markets, growth investors normally buy companies that they believe are capable of
increasing sales, earnings, and other important business metrics by a minimum amount each year.
Growth is often discussed in opposition to value, but sometimes the lines between the two
approaches become quite fuzzy in practice.
Income
Although today common stocks are widely purchased by people who expect the shares to
increase in value, there are still many people who buy stocks primarily because of the stream of
dividends they generate. Called income investors, these individuals often entirely forego
companies whose shares have the possibility of capital appreciation for high-yielding dividend-
paying companies in slow-growth industries. These investors focus on companies that pay high
dividends like utilities and real estate investment trusts (REITs), although many times they may
invest in companies undergoing significant business problems whose share prices have sunk so
low that the dividend yield is consequently very high.
GARP

55. 55
GARP, aside from being the name of the title character to John Irving's The World
According to Garp, is an acronym for growth at a reasonable price. The world according to GARP
investors combines the value and growth approaches and adds a numerical slant. Practitioners look
for companies with solid growth prospects and current share prices that do not reflect the intrinsic
value of the business, getting a "double play" as earnings increase and the price/earnings (P/E) ratios
at which those earnings are valued increase as well. Peter Lynch, who may be familiar to you
through his starring role in Fidelity Investments commercials with Lily Tomlin and Don Rickles, is
GARP's most famous practitioner.
One of the most common GARP approaches is to buy stocks when the P/E ratio is lower than
the rate at which earnings per share can grow in the future. As the company's earnings per share
grow, the P/E of the company will fall if the share price remains constant. Since fast-growing
companies normally can sustain high P/Es, the GARP investor is buying a company that will be
cheap tomorrow if the growth occurs as expected. If the growth does not come, however, the GARP
investor's perceived bargain can disappear very quickly.
Because GARP presents so many opportunities to focus just on numbers instead of looking at
the business, many GARP approaches, like the nearly ubiquitous PEG ratio and Jim O'Shaughnessy's
work in What Works on Wall Street are really hybrids of fundamental analysis and another type of
analysis -- quantitative analysis.
Quality
Most investors today use a hybrid of value, growth, and GARP approaches. These investors are
looking for high-quality businesses selling for "reasonable" prices. Although they do not have any
shorthand rules for what kind of numerical relationships there should be between the share price and
business fundamentals, they do share a similar philosophy of looking at the company's valuation and
at the inherent quality of the company as measured both quantitatively by concepts like Return on
Equity (ROE) and qualitatively by the competence of management. Many of them describe
themselves as value investors, although they concentrate much more on the value of the company as
an ongoing concern rather than on liquidation value.
Warren Buffett of Berkshire Hathaway is probably the most famous practitioner of this
approach. He studied under Benjamin Graham at Columbia Business School but was eventually
swayed by his partner, Charlie Munger, to also pay attention to Phil Fisher's message of growth and
quality.

56. 56
Arguments against Fundamental Analysis
Those who do not use fundamental analysis have two major arguments against it. The first is
that they believe that this type of investing is based on exactly the kind of information that all major
participants in publicly traded markets already know, so therefore it can provide no real advantage. If
you cannot get a leg up by doing all of this fundamental work understanding the business, why
bother? The second is that much of the fundamental information is "fuzzy" or "squishy," meaning
that it is often up to the person looking at it to interpret its significance. Although gifted individuals
can succeed, this group reasons, the average person would be better served by not paying attention to
this kind of information.
Quantitative Analysis - Buying the Numbers
Pure quantitative analysts look only at numbers with almost no regard for the underlying
business. The more you find yourself talking about numbers, the more likely you are to be using a
purely quantitative approach. Although even fundamental analysis requires some numerical inputs,
the primary concern is always the underlying business, focusing on things like management's
expertise, the competitive environment, the market potential for new products, and the like.
Quantitative analysts view these things as subjective judgments, and instead focus on the
incontrovertible objective data that can be analyzed.
One of the principal minds behind fundamental analysis, Benjamin Graham, was also one of
the original proponents of this trend. While running the Graham-Newman partnership, Graham
exhorted his analysts to never talk to management when analyzing a company and focus completely
on the numbers, as management could always lead one astray.
In recent years as computers have been used to do a lot of number crunching, many "quants," as
they like to call themselves, have gone completely native and will only buy and sell companies
on a purely quantitative basis, without regard for the actual business or the current valuation - a
radical departure from fundamental analysis. "Quants" will often mix in ideas like a stock's
relative strength, a measure of how well the stock has performed relative to the market as a
whole. Many investors believe that if they just find the right kinds of numbers, they can always
find winning investments. D. E. Shaw is widely viewed as the current King of the Quants, using
sophisticated mathematical algorithms to find minute price discrepancies in the markets. His
partnership sometimes accounts for as much as 50% of the trading volume on the New York

57. 57
Stock Exchange in a single day.
Company Size
Some investors purposefully narrow their range of investments to only companies of a
certain size, measured either by market capitalization or by revenues. The most common way to
do this is to break up companies by market capitalization and call them micro-caps, small-caps,
mid-caps, and large-caps, with "cap" being short for "capitalization." Different-size companies
have shown different returns over time, with the returns being higher the smaller the company.
Others believe that because a company's market capitalization is as much a factor of the market's
excitement about the company as it is the size, revenues are a much better way to break up the
company universe. Although there is no set breakdown used by all investors, most distinctions
look something like this:

MICRO - $100 million or less



SMALL - $100 million to $500 million



MID - $500 million to $5 billion



LARGE - $5 billion or more

The majority of publicly traded companies fall in the micro or small categories. Some
statisticians believe that the perceived outperformance of these smaller companies may have
more to do with "survivor" bias than actual superiority, as many of the databases used to do this
performance testing routinely expunged bankrupt companies until pretty recently. Since smaller
companies have higher rates of bankruptcy, excluding this factor helps "juice" up their historical
returns as a result. However, this factor is still being debated.
Screen-Based Investing
Many quantitative analysts use "screens" to select their investments, meaning that they
use a number of quantitative criteria and examine only the companies that meet these criteria. As
the use of computers has become widespread, this approach has increased in popularity because
it is easy to do. Screens can look at any number of factors about a company's business or its stock
over many time periods.
Arguments against Quantitative Analysis
Because quantitative analysis hinges on screens that anyone can use, as computing

58. 58
horsepower becomes cheaper and cheaper many of the pricing inefficiencies quantitative analysis
finds are wiped out soon after they are discovered. If a particular screen has generated 40% returns
per year and becomes widely known, and if lots of money flows into the companies that the screen
identifies, the returns will start to suffer.
As "fuzzy" as fundamental analysis might be, there are often times that knowing even a little
about the company you are buying can help a lot. For instance, if you are using a high-relative-
strength screen, you should always check and see if the companies you find have risen in price
because of a merger or an acquisition. If this is the case, then the price will probably stay right where
it is, even if the "screen" you used to pick this company has generated high annual returns in the past.
Capital Appreciation
One of the two components of total return, capital appreciation is how much the underlying
value of a security has increased. If you bought a stock at $10 and it has risen to $13, you have
enjoyed a 30% return from the appreciation of the original capital you invested. Dividend yield is the
other component of total return.
Dividend Yield
A ratio of a company's annual cash dividends divided by its current stock price expressed in the
form of a%age. To get the expected annual cash dividend payment, take the next expected quarterly
dividend payment and multiply that by four. For instance, if a $10 stock is expected to pay a 25 cent
quarterly dividend next quarter, you just multiple 25 cents by 4 to get $1 and then divide this by $10
to get a dividend yield of 10%.
Ann. Div. $0.25* 4
Dividend Yield = = = 0.10 = 10%
P rice $ 10
Many newspapers and online quote services will include dividend yield as one of the
variables. If you are uncertain whether the current quoted dividend yield reflects a recent
increase in the dividend a company may have made, you can call the company and ask
them what the dividend per share they expect to pay next quarter will be.