Trading in stock exchange

UNIVERSITY INSTITUTE OF ENGINEERING & TECHNOLOGY

REPORT
ON
“TRADING IN STOCK EXCHANGE”
July-Dec 2012(MBA, 9th SEM)
DATED: 3-11-2012

TEACHER CONCERNED: Submitted by:
Mr. Rajesh Jhamb ABHAY SOOD (UM8402)
NAVPREET SINGH (UM8504)
PARUL MITTAL (UM8505)
SUMEET KAUR (UM8510)

ACKNOWLEDGEMENT
It is our pleasure to be indebted to various people, who directly or indirectly
contributed in the development of this work and who influenced our thinking, behavior, and
acts during the course of study.
We are thankful to Mr. Rakesh Jhamb for his support, cooperation, and motivation
provided to me during the project for constant inspiration, presence and blessings.
We also extend sincere appreciation to Mr. Harmeet Singh, Mr. Manoj Thakur, Mr.
Smile Baly who provided their valuable suggestions and precious time in accomplishing this
project report.
Lastly, we would like to thank the almighty and our parents for their moral support
and our friends with whom we shared our day-to-day experience and received lots of
suggestions that improved our quality of work.

CONTENTS
CH 1 : BASICS OF INVESTMENTS
1.1 INVESTMENT

1.2 FINANCIAL MARKETS

1.2.1 STRUCTURE OF FINANCIAL MARKET

1.3 STOCK EXCHANGE

1.4 SEBI (Security and Exchange Board of India)

1.4.1 OBJECTIVES

1.4.2 FUNCTIONS

1.5 BSE (Bombay Stock Exchange)

1.5.1 BSE SENSEX

1.5.2 CALCULATION

1.6 NSEI (National Stock Exchange of India)

1.6.1 Market Segments

1.6.2 S&P CNX NIFTY

1.7 MCX (Multi Commodity Exchange)

1.8 NCDEX

1.9 FOREX

1.10 STOCKS BY SIZE AND SECTORS

1.11 MUTUAL FUNDS

1.11.1 CHARACHTERISTICS

1.11.2 RISK RETURN MATRIX

1.11.3 WORKING

1.11.4 TYPES

1.11.5 TYPES OF RETURNS

1.11.6 ADVANTAGES

1.11.7 DISADVANTAGES

1.12 ETFs

1.12.1 WORKING

1.12.2 COMPARISON WITH MUTUAL FUNDS

1.12.3 ADVANTAGES

1.12.4 DISADVANTAGES

Ch-2 Margin trading and Technical Analysis

2.1 Margin Trading
a. Margin account

b. Margin call

2.2 Futures

a. Marging trading vs future

b. how do future markets benefit society

2.3 Options

a. call,put,premium

b. How to start option trading

c. why option trading

2.4 Technical analysis

a. Timeframe

b. equidistant channel

c. support and resistance

d. Trendlines

e. moving averages

Ch-3 Factors affecting market
3.1 factors affecting market

3.1.1 Introduction
3.1.2 Effect on Short- and Long-Term Trends due to above factors
3.2 other factors affecting market

3.2.1 Policies
3.2.2 World market
 3.2.2.a recession
 3.2.2.b inflation
 3.2.2.c deflation
3.2.3 Schemes
3.2.4 Scams
 1992 security scandal
 Satyam scandal
3.2.5 increase in gold prices
3.2.6 increase in crude oil prices
3.2.7 increase in copper prices
3.2.8 seasonal changes in crop prices on MCX
3.2.9 right issue and bonus issue on stock price

Ch-4 FUNDAMENTAL ANALYSIS
4.1 Financial Literacy and its Vital Learning’s
a. Seven Cures of Lean Purse
b. The Five Laws of Gold
c. Cash-flow (LONG TERM INVESTMENT)

4.2 How to Follow Money in Stock Exchange

a. A Basic Understanding of Accounting
b. Role of Financial Statements
c. Principal Financial Statements
 Balance Sheet
 Income Statement
 Cash Flow Statement

4.3 Everything Is Number and Ratio

a. Ratios Galore
b. Management Performance Ratios
c. Debt or Leverage Ratios
d. Liquidity Ratios
e. Price Ratios with Earnings and Dividends

BIBLIOGRAPHY

LIST OF FIGURES
1.1 Functions of Financial Markets
1.2 Financial Market Structure
1.3 Indian Financial Market Structure
1.4 SENSEX movement from 1998-2011
1.5 NIFTY movement from 1998-2011
1.6 Currency
1.7 FOREX Chart
1.8 Risk Return Matrix
1.9 Mutual Fund Organisation
1.10 Types of Mutual Funds
1.11 ETF Working

CHAPTER 1: BASICS OF INVESTMENT
1.1 INVESTMENT
 Meaning of Investment
An investment involves the choice by an individual or an organization such as a pension fund, after some
analysis or thought, to place or lend money in a vehicle, instrument or asset, such as property, commodity,
stock, bond, financial derivatives (e.g. futures or options), or the foreign asset denominated in foreign
currency, that has certain level of risk and provides the possibility of generating returns over a period of time.

When an asset is bought or a given amount of money is invested in the bank, there is anticipation that some
return will be received from the investment in the future.

 1.2 Fundamentals of Investment
There are three fundamentals of investment, namely:

 SAFETY

 LIQUIDITY

 RETURN

1.2. FINANCIAL MARKETS
A financial market is a market in which people and entities can trade financial securities, commodities, and
other fungible items of value at low transaction costs and at prices that reflect supply and demand. Securities
include stocks and bonds, and commodities include precious metals or agricultural goods.

Fig 1.1: Function of Financial Markets

1.2.1 STRUCTURE OF FINANCIAL MARKET

Fig1.2: Financial Market Structure

1.3. STOCK EXCHANGE
A stock exchange is a regulated market which provides services for stock brokers and traders to trade stocks,
bonds, and other securities.

The initial offering of stocks and bonds to investors is done in the primary market and subsequent trading is
done in the secondary market. Supply and demand in stock markets are driven by various factors that, as in
all free markets, affect the price of stocks.

1.4. SEBI (Security and Exchange Board of India)
It was established in 1988 to regulate functions of security market. Initially SEBI was not able to exercise
complete control over stock market transactions. As a result it was given legal status in1992 under SEBI Act,
1992 which is having a separate entity and perpetual succession.

SEBI is statutory organization established to protect the interest of investors, development and regulation of
security market.

Fig 1.3: Indian Financial Market Structure

1.4.1 Objectives of SEBI

To regulate the activities of security market to promote the orderly function.
To protect the rights and interest of investors.
To keep a check on malpractices by having balance between self regulation and its statutory
regulation.
To regulate and develop the code of conduct and fair practices by intermediaries like brokers,
merchant bankers.

1.4.2 Functions of SEBI

1. REGULATION

a) Registration of brokers and sub-brokers and other players in the market

b) Registration of collective investments schemes and Mutual Funds

c) Regulation of stock exchanges and other Self-Regulatory Organizations (SRO), Merchant banks etc

d) Prohibition of all fraudulent and unfair trade practices

e) Calls for information, undertakes inspection, conducts audits and enquiries of Stock Exchanges.

2. DEVELOPMENT

a) Training of intermediaries

b) Promotion of fair practices and Code of conduct for all S.R.O.s

c) Conducting Research and Publishing information useful to all market participants

3. PROTECTION

a) Investor education by giving press notes and booklets.

b) Controlling Insider Trading and takeover bids and imposing penalties for such practices

c) Safeguards investors by providing booklets for educating them

1.5 BOMBAY STOCK EXCHANGE (BSE)
Bombay Stock Exchange is a stock exchange located on Dalal Street, Mumbai. It is the oldest stock exchange
in Asia. The Bombay Stock Exchange was established in 1875. The equity market capitalization of the
companies listed on the BSE was US$1 trillion as of December 2011, making it the 6th largest stock exchange
in Asia and the 14th largest in the world. The BSE has the largest number of listed companies in the world.

As of March 2012, there are over 5,133 listed Indian companies and over 8,196 on the stock exchange, the
Bombay Stock Exchange has a significant trading volume.

1.5.1 BSE SENSEX

The BSE SENSEX (Bombay Stock Exchange Sensitive Index), also called the BSE 30 or simply the SENSEX, is a
free-float market capitalization-weighted stock market index of 30 well-established and financially sound
companies listed on Bombay Stock Exchange (BSE). The 30 component companies which are some of the
largest and most actively traded stocks are representative of various industrial sectors of the Indian economy.
The base value of the SENSEX is taken as 100 on April 1, 1979, and its base year as 1978-79.

The 30 companies that make up the Sensex are selected and reviewed from time to time by an “index
committee”. This “index committee” is made up of academicians, mutual fund managers, finance journalists,
independent governing board members and other participants in the financial markets.

Apart from BSE SENSEX, which is the most popular stock index in India, BSE uses other stock indices as well
like BSE 500, BSE 100, BSE 200, BSE PSU, BSE MIDCAP,BSE SMLCAP,BSE BANKEX, BSE Teck, BSE Auto, BSE
Pharma, BSE Fast Moving Consumer Goods (FMCG), BSE Metal etc.

1.5.2 Calculation

Sensex is calculated as per free float capitalization methodology. According to this methodology, the level of
index at any point of time reflects the free float market value of 30 component stocks relative to a base
period. The market capitalization of a company is determined by multiplying the price of its stock by the
number of shares issued by the company. This market capitalization is multiplied by a free float factor to
determine the free float market capitalization. Free float factor is also referred as adjustment factor. Free
float factor represents the percentage of shares that are readily available for trading.

The calculation of SENSEX involves dividing the free float market capitalization of 30 companies in the index
by a number called index divisor. The divisor is the only link to original base period value of the SENSEX. It
keeps the index comparable over time and is the adjustment point for all index adjustments arising out of
corporate actions, replacement of scrips, etc.

Fig 1.4: SENSEX Movement from 1998-2011

1.6 NATIONAL STOCK EXCHANGE OF INDIA (NSEI)
The National Stock Exchange (NSE) is stock exchange located at Mumbai, Maharashtra, India. It is in the top
20 largest stock exchanges in the world by market capitalization and largest in India by daily turnover and

number of trades, for both equities and derivative trading. NSE has a market capitalization of around US$1
trillion and over 1,652 listings as of July 2012. The NSE's key index is the S&P CNX Nifty, known as the NSE
NIFTY (National Stock Exchange Fifty), an index of fifty major stocks weighted by market capitalization.

NSE is mutually owned by a set of leading financial institutions, banks, insurance companies and other
financial intermediaries in India but its ownership and management operate as separate entities.

1.6.1 Market segments of NSEI

1. Debt market segment

It provides a trading platform for wide range of fixed income securities such as treasury bills, bonds, zero
coupon bonds, Certificate of Deposits (COD), Commercial Paper(CPs), Central Government securities.

2. Capital Market segment:

It provides an efficient and transparent trading in equity, preference shares, debentures as well as
government securities.

1.6.2 S&P CNX Nifty

The S&P CNX Nifty, also called the Nifty 50 or simply the Nifty, is a stock market index, and one of several
leading indices for large companies which are listed on National Stock Exchange of India. Nifty is owned and
managed by India Index Services and Products Ltd. (IISL), which is a joint venture between NSE and CRISIL
(Credit Rating and Information Services of India Ltd).

The S&P CNX Nifty consists of 50 companies and covers 22 sectors of the Indian economy and offers
investment managers exposure to the Indian market in one portfolio. The S&P CNX Nifty stock represents
about 65% of the free float market capitalization of the stocks listed at National Stock Exchange (NSE) as on
March 30, 2012.

Fig 1.5: Nifty movement from 1998-2011

The S&P CNX Nifty index is a free float market capitalization weighted index. The base period for the S&P CNX
Nifty index is November 3, 1995 and the base value of the index has been set at 1000, and a base capital of Rs
2.06 trillion.

1.7 MULTI COMMODITY EXCHANGE (MCX)
Commodity markets are markets where raw or primary products are exchanged.

Multi Commodity Exchange of India Ltd (MCX) is an independent commodity exchange based in India. It was
established in 2003 and is based in Mumbai. The turnover of the exchange for the fiscal year 2009 was US$
1.24 trillion, and in terms of contracts traded, it was in 2009 the world's sixth largest commodity exchange.

MCX offers more than 40 commodities across various segments such as bullion, ferrous and non-ferrous
metals, energy, and a number of agri-commodities on its platform.

It is regulated by the Forward Markets Commission.

MCX was the first exchange in India to initiate evening sessions to synchronize with the trading hours
of global exchanges in London, New York and other major international markets.
It was the first exchange in India to offer futures trading in steel, crude oil, and almond
MCX is India's No. 1 commodity exchange with 83% market share in 2009
Globally, MCX ranks no. 1 in silver, no. 2 in natural gas, no. 3 in crude oil and gold in futures trading.
The highest traded item is gold.
MCX has several strategic alliances with leading exchanges across the globe
As of early 2010, the normal daily turnover of MCX was about US$ 6 to 8 billion
MCX now reaches out to about 800 cities and towns in India with the help of about 126,000 trading
terminals

MCX COMDEX is India's first and only composite commodity futures price index

In June 2005, MCX launched MCXCOMDEX, India’s first real time composite commodity futures index, which
provides our members with valuable information regarding market movements in the key commodities, as
determined by physical market size in India, which are actively traded on our Exchange.

There are other indexes like MCXAgri (agricultural commodities index), MCXEnergy (energy commodities
index) and MCXMetal (metal commodities index).

There are three rain indices, namely RAINDEXMUM (Mumbai), RAINDEXIDR (Indore), and RAINDEXJAI (Jaipur)
which track the progress of monsoon rains in their respective geographic locations. In December 2009, EFP
transactions were launched for the first time in India, which enables parties with futures positions to swap
their positions in the physical markets and vice versa.

1.8 NATIONAL COMMODITY AND DERIVATIVES EXCHANGE (NCDEX)
National Commodity & Derivatives Exchange Limited (NCDEX) is an online multi commodity exchange based
in India. It was incorporated as a private limited company incorporated on 23 April 2003 under the
Companies Act, 1956. It has commenced its operations on 15 December 2003. NCDEX is a closely held private

company which is promoted by national level institutions and has an independent Board of Directors and
professionals not having vested interest in commodity markets. NCDEX is regulated by Forward Market
Commission (FMC) in respect of futures trading in commodities. 57 commodities are traded on this exchange.

1.9 FOREIGN EXCHANGE MARKET (FOREX)
The foreign exchange market (FOREX or currency market) is a form of exchange for the global decentralized
trading of international currencies. The foreign exchange market determines the relative values of different
currencies.

The foreign exchange market assists international trade and investment by enabling currency conversion. For
example, it permits a business in the United States to import goods from the European Union member states
especially Euro zone members and pay Euros, even though its income is in United States dollars. It also
supports direct speculation in the value of currencies, and the carry trade, speculation based on the interest
rate differential between two currencies.

FOREX, unlike other financial markets, is not tied to an actual stock exchange. Forex is an over-the-counter
(OTC) or off-exchange market. It’s a 24 hour market. The spot exchange rate refers to the current exchange
rate. The forward exchange rate refers to an exchange rate that is quoted and traded today but for delivery
and payment on a specific future date.

Fig 1.6: Currency

1.9.1 Purpose

The foreign exchange market is the mechanism by which currencies are valued relative to one another, and
exchanged. An individual or institution buys one currency and sells another in a simultaneous transaction.
Currency trading always occurs in pairs where one currency is sold for another and is represented in the
following notation: EUR/USD or CHF/YEN. The exchange rate is determined through the interaction of market
forces dealing with supply and demand.

Foreign Exchange Traders generate profits, or losses, by speculating whether a currency will rise or fall in
value in comparison to another currency. A trader would buy the currency which is anticipated to gain in
value, or sell the currency which is anticipated to lose value against another currency. The value of a
currency, in the simplest explanation, is a reflection of the condition of that country's economy with respect
to other major economies. Reactive trading is the buying or selling of currencies in response to economic or
political events, while speculative trading is based on a trader anticipating events.

1.9.2 Operation

The 8 Major Currencies

Whereas there are thousands of securities on the stock market, in the FOREX market most trading takes place
in only a few currencies; the U.S. Dollar ($), European Currency Unit (€), Japanese Yen (¥), British Pound
Sterling (£), Swiss Franc (Sf), Canadian Dollar (Can$), and to a lesser extent, the Australian and New Zealand
Dollars. These major currencies are most often traded because they represent countries with esteemed
central banks, stable governments, and relatively low inflation rates.

Currencies are also always traded in pairs (i.e. USD/JPY or Dollar/Yen) at floating exchange rates.

The foreign exchange market is the most liquid financial market in the world. Traders include large banks,
central banks, institutional investors, currency speculators, corporations, governments, other financial
institutions, and retail investors.

1.9.3 How to Read a FOREX Chart

Fig 1.7: FOREX Chart

The current exchange rate is shown as a brown line with the pair’s price in a brown box. In the above chart,
the current rate (120.93) for the USD/JPY pair means 1 Dollar is exchanged for 120.93 Yen. Forex notation is a
little awkward as the rate is equivalent to how much of the counter currency (second in the pair) is required
to exchange for 1 unit of the base currency (first in the pair). Therefore, the notation is upside down from the
normal logic of using a fraction. When the value of the base currency, here the Dollar, is rising, the rate will
be moving upwards If the rate changes from 120.93 to 121.50, it will take more Yen to buy the same amount
of Dollars. When the situation is reversed, the Japanese currency is doing better and the pair's price will fall.
It will take less Yen to buy the same amount of Dollars.

1.9.4 Fluctuations in exchange rates

A market based exchange rate will change whenever the values of either of the two component currencies
change. A currency will tend to become more valuable whenever demand for it is greater than the available
supply. It will become less valuable whenever demand is less than available supply (this does not mean

people no longer want money, it just means they prefer holding their wealth in some other form, possibly
another currency).

Increased demand for a currency can be due to either an increased transaction demand for money or an
increased speculative demand for money. The transaction demand is highly correlated to a country's level of
business activity, gross domestic product (GDP), and employment levels. The more people that are
unemployed, the less the public as a whole will spend on goods and services. Central banks typically have
little difficulty adjusting the available money supply to accommodate changes in the demand for money due
to business transactions.

Speculative demand is much harder for central banks to accommodate, which they influence by adjusting
interest rates. A speculator may buy a currency if the return (that is the interest rate) is high enough. In
general, the higher a country's interest rates, the greater will be the demand for that currency. It has been
argued that such speculation can undermine real economic growth, in particular since large currency
speculators may deliberately create downward pressure on a currency by shorting in order to force that
central bank to sell their currency to keep it stable. When that happens, the speculator can buy the currency
back from the bank at a lower price, close out their position, and thereby take a profit.

1.10 STOCKS BY SIZE AND SECTOR
There are thousands of stocks to choose from, so investors usually like to put stocks into different categories:
size, style and sector.

1.10.1By size
A company's size refers to its market capitalization, which is the current share price times the total number of
shares outstanding. It's how much investors think the whole company is worth.

XYZ Corp., for example, may have 2 billion shares outstanding, and a stock price of $10. So the company's
total market capitalization is $20 billion. A thumb rule

Mega-cap: Over $200 billion
Large-cap: Over $10 billion
Mid-cap: $2 billion–$10 billion
Small-cap: $250 million–$2 billion
Micro-cap: Below $250 million
Nano-cap: Below $50 million

Large-cap companies tend to be established and stable, but because of their size, they have lower growth
potential than small caps. Over the long run, small-cap stocks have tended to rise at a faster pace. It's much
easier to expand revenues and earnings quickly when you start at, say, $10 million than $10 billion. When
profitability rises, stock prices follow.

1.10.2By sector

Market is basically classified into 11 different sectors. Investors consider two of these sectors “defensive” and
the remaining nine “cyclical.”

 Defensive

Defensive stocks include utilities like water, electric, gas and consumer staples like beverages, cosmetics,
foods, medical products, tobacco etc. These companies usually don’t suffer as much in a market downturn
because people don’t stop using energy or eating. They provide a balance to portfolios and offer protection in
a falling market.

However, for all their safety, defensive stocks usually fail to climb with a rising market for the opposite
reasons they provide protection in a falling market: people don’t use significantly more energy or eat more
food.

 Cyclical stocks

Cyclical stocks, on the other hand, cover everything else and tend to react to a variety of market conditions
that can send them up or down, however when one sector is going up another may be going down.

Here is a list of the nine sectors considered cyclical:

1. Basic materials – aluminium, steel, gold mining, metals, paper, containers, lumbar
2. Capital goods – aerospace, engineering, construction, machinery, manufacturing , electrical
equipment
3. Communications – communication equipment, mobile phone, broadband
4. Consumer cyclical – automobiles, building materials, leisure time, retail, restaurants, textiles, home
building
5. Energy – gas, oil
6. Financial – banks, insurance, loans, brokerages
7. Health care – pharmecuticals, private hospitals
8. Technology – computer software, electronics, photography, office equipment
9. Transportation – delivery services, logistics

Investors call them cyclical because they tend to move up and down in relation to businesses cycles or other
influences.

1.11 MUTUAL FUNDS
Mutual funds refer to the funds that are raised and invested mutually, i.e. on behalf of everyone participating
in the scheme. Hence it can be said that mutual fund is just the connecting bridge or a financial intermediary
that allows a group of investors to pool their money together with a predetermined investment objective. If
you and your friend both pool your money and invest it jointly, you have created your own mutual fund.

1.11.1Characteristics:
 A mutual fund actually belongs to the investors who have pooled their funds.

 A mutual fund is managed by investment professionals and other service providers, who earn a fee
for their services, from the fund.

 The pool of funds is invested in a portfolio of marketable investments. The value of the portfolio is
updated every day.

 The investor’s share in the fund is denominated by ‘units’. The value of the units changes with
change in the portfolio’s value, every day.

1.11.2 Risk Return Matrix

The risk return trade-off indicates that if investor is willing to take higher risk then correspondingly he can
expect higher returns and vice versa if he pertains to lower risk instruments, which would be satisfied by
lower returns. For example, if an investors opt for bank FD, which provide moderate return with minimal
risk. But Mutual funds are less risky and provide more returns. This is because the money that is pooled in are
not invested only in debts funds which are less riskier but are also invested in the stock markets which
involves a higher risk but can expect higher returns. Hedge fund involves a very high risk since it is mostly
traded in the derivatives market which is considered very volatile.

Fig 1.8: Risk Return Matrix

1.11.3 Working of Mutual funds

To protect the interest of the investors, SEBI formulates policies and regulates the mutual funds. It notified
regulations in 1993 (fully revised in 1996) and issues guidelines from time to time. MF either promoted by
public or by private sector entities including one promoted by foreign entities is governed by these
Regulations.

SEBI approved Asset Management Company (AMC) manages the funds by making investments in various
types of securities. Custodian, registered with SEBI, holds the securities of various schemes of the fund in its
custody.

According to SEBI Regulations, two thirds of the directors of Trustee Company or board of trustees must be
independent.

The Association of Mutual Funds in India (AMFI) reassures the investors in units of mutual funds that the
mutual funds function within the strict regulatory framework. Its objective is to increase public awareness of
the mutual fund industry.

Fig 1.9: Mutual Fund Organization

AMFI also is engaged in upgrading professional standards and in promoting best industry practices in diverse
areas such as valuation, disclosure, transparency etc.

1.11.4 Types of MUTUAL FUNDS

Fig 1.10: Types of MUTUAL FUNDS

 On basis of STRUCTURE

1. Open - Ended Schemes:
An open-end fund is one that is available for subscription all through the year. These do not have a fixed maturity.
Investors can conveniently buy and sell units at Net Asset Value ("NAV") related prices. The key feature of open-
end schemes is liquidity.

2. Close - Ended Schemes:
A Close-Ended fund is open for subscription only during a specified period, generally at the time of initial public
issue. The Close-Ended fund scheme is listed on the some stock exchanges where an investor can buy or sell the
units of this type of scheme.

3. Interval Schemes:
Interval Schemes are that scheme, which combines the features of open-ended and close-ended schemes. The
units may be traded on the stock exchange or may be open for sale or redemption during pre-determined intervals
at NAV related prices.

 On basis of NATURE

1. Equity fund:
These funds invest a maximum part of their corpus into equities holdings. The structure of the fund may vary
different for different schemes and the fund manager’s outlook on different stocks. The Equity Funds are sub-
classified depending upon their investment objective, as follows:

Diversified Equity Funds
Mid-Cap Funds
Sector Specific Funds
Tax Savings Funds (ELSS)

Equity investments are meant for a longer time horizon, thus Equity funds rank high on the risk-return matrix.
2. Debt funds:
The objective of these Funds is to invest in debt papers. By investing in debt instruments, these funds ensure low
risk and provide stable income to the investors. Debt funds are further classified as:

Gilt Funds: Invest their corpus in securities issued by Government, popularly known as Government of India
debt papers. These Funds carry zero Default risk but are associated with Interest Rate risk. These schemes
are safer as they invest in papers backed by Government.

Income Funds: Invest a major portion into various debt instruments such as bonds, corporate debentures
and Government securities.

MIPs: Invests maximum of their total corpus in debt instruments while they take minimum exposure in
equities. It gets benefit of both equity and debt market. These scheme ranks slightly high on the risk-return
matrix when compared with other debt schemes.

Short Term Plans (STPs): Meant for investment horizon for three to six months. These funds primarily
invest in short term papers like Certificate of Deposits (CDs) and Commercial Papers (CPs). Some portion of
the corpus is also invested in corporate debentures.

Liquid Funds: Also known as Money Market Schemes, These funds provides easy liquidity and preservation
of capital. These schemes invest in short-term instruments like Treasury Bills, inter-bank call money market,
CPs and CDs. These funds are meant for short-term cash management of corporate houses and are meant
for an investment horizon of 1day to 3 months. These schemes rank low on risk-return matrix and are
considered to be the safest amongst all categories of mutual funds.

3. Balanced funds:
As the name suggest they, are a mix of both equity and debt funds. They invest in both equities and fixed income
securities, which are in line with pre-defined investment objective of the scheme. Equity part provides growth and
the debt part provides stability in returns.
 Other schemes

Tax Saving Schemes:
Under Sec.88 of the Income Tax Act 1961, contributions made to any Equity Linked Savings Scheme (ELSS) are
eligible for rebate.

Index Schemes:
Index schemes attempt to replicate the performance of a particular index such as the BSE Sensex or the NSE
50. The portfolio of these schemes will consist of only those stocks that constitute the index. And hence, the
returns from such schemes would be more or less equivalent to those of the Index.

Sector Specific Schemes:
These are the funds/schemes which invest in the securities of only those sectors or industries as specified in
the offer documents. e.g. Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG), Petroleum
stocks, etc. The returns in these funds are dependent on the performance of the respective sectors/industries.
These are most risky ones.

1.11.5 Types of returns
There are three ways, where the total returns provided by mutual funds can be enjoyed by investors:
Income is earned from dividends on stocks and interest on bonds. A fund pays out nearly all income it
receives over the year to fund owners in the form of a distribution.

If the fund sells securities that have increased in price, the fund has a capital gain. Most funds also pass on
these gains to investors in a distribution.

1.11.6 Advantages of Investing Mutual Funds
1. Professional Management - The basic advantage of funds is that, they are professional managed, by well
qualified professional. Investors purchase funds because they do not have the time or the expertise to manage
their own portfolio.

2. Diversification - The idea behind diversification is to
invest in a large number of assets so that a loss in any
particular investment is minimized by gains in others.
3. Economies of Scale - Mutual fund buy and sell large amounts of securities at a time, thus help to reducing
transaction costs, and help to bring down the average cost of the unit for their investors.
4. Liquidity - Just like an individual stock, mutual fund also allows investors to liquidate their holdings as and when
they want.
5. Simplicity - Investments in mutual fund is considered to be easy, compare to other available instruments in the
market, and the minimum investment is small. Most AMC also have automatic purchase plans whereby as little as
Rs. 2000, where SIP start with just Rs.50 per month basis.

1.11.7 Disadvantages of Investing Mutual Funds
1. Professional Management- Some funds do not perform in neither the market as their management is not
dynamic enough to explore the available opportunity in the market, thus many investors debate over whether or
not the so-called professionals are any better than mutual fund or investor himself, for picking up stocks.
2. Costs – The biggest source of AMC income is generally from the entry & exit load which they charge from an
investor at the time of purchase. The mutual fund industries are thus charging extra cost under layers of jargon.
3. Dilution - Because funds have small holdings across different companies, high returns from a few investments
often don't make much difference on the overall return. Dilution is also the result of a successful fund getting too
big. When money pours into funds that have had strong success, the manager often has trouble finding a good
investment for all the new money.
4. Taxes - when making decisions about your money, fund managers don't consider your personal tax situation. For
example, when a fund manager sells a security, a capital-gain tax is triggered, which affects how profitable the
individual is from the sale. It might have been more advantageous for the individual to defer the capital gains
liability.

1.11.8 How do the funds raise money?

The asset management companies (AMCs) that manage the mutual funds define avenues where they think
profitable opportunities exist. For example, currently many AMCs believe that small and medium cap stocks will
yield significant return over the medium to long term. Hence, they launch a 'fund' (called a new fund offer: NFO)
which seeks to bring all those investors together who believe similarly.

The AMC releases a prospectus wherein it details the objective of the fund, the credentials of the company and the
fund manager and the avenues where the money will be invested. Based on this information, the investor needs to
decide whether this fund meets his objective or not. If the investor (or his advisor) believes that the new fund fits
his required risk-return profile, the investor invests in the fund.

1.12 EXCHANGE TRADED FUNDS
An ETF is an investment company whose shares are traded intraday on stock exchanges at market-determined
prices. Investors may buy or sell ETF shares through a broker or in a brokerage account just as they would the
shares of any publicly traded company. Most ETFs are structured as open-end investment companies (open-end
funds) or unit investment trusts, but other structures also exist—primarily for ETFs that invest in commodities,

currencies, and futures.

An exchange-traded fund, or ETF, is an investment product representing a basket of securities that track an index
such as the Standard & Poor's 500 Index, BSE Sensex, Nifty etc . ETFs, which are available to individual investors
only through brokers and advisers, trade like stocks on an exchange. The returns one can expect from ETFs will be
equal to the rise in the index.

ETFs are a mix of a stock and a MF in the sense that

Like mutual funds they comprise a set of specified stocks e.g. an index like Nifty/Sensex or a commodity
e.g. gold; and

Like equity shares they are traded on the stock exchange on real-time basis.

1.12.1 How does an ETF work?
In a normal fund we buy/sell units directly from/to the AMC. First the money is collected from the investors to
form the corpus. The fund manager then uses this corpus to build and manage the appropriate portfolio. When
you want to redeem your units, a part of the portfolio is sold and you get paid for your units. The units in a
conventional MF are, therefore, called in-cash units.

But in ETF, we have something called the authorized participants (appointed by the AMC). They will first deposit all
the shares that comprise the index (or the gold in case of Gold ETF) with the AMC and receive what is called the
creation units from the AMC. Since these units are created by depositing underlying shares/gold, they are called in-
kind units.

Investors generally do not purchase Creation Units with cash. Instead, they buy Creation Units with a basket of
securities that generally mirrors the ETF’s portfolio. Those who purchase Creation Units are frequently institutions.
These creation units are a large block, which are then split into small units and accordingly bought/sold in the
open market on the stock exchange by these authorized participants.

Working of ETF

Fig 1.11: ETF working

1.12.2 Comparison with conventional MFs

1. Since all ETFs require certain specific shares to be deposited for units to be created, they all are usually

index-specific like Nifty, Sensex, Bankex etc. As against this, a conventional MF can have any portfolio
(though as per the pre-defined objective). Of course index funds will also mimic the index and hence to that
extent ETFs & index funds are same
2. Because ETFs are index-specific, the portfolio remains more or less constant, whereas portfolio of an
actively managed conventional MF will change on day-to-day basis. Hence, while portfolio of ETF is known
beforehand, the portfolio of a conventional MF can be known only at the time of month-end disclosures.
3. ETFs are bought/sold on the stock exchange and need a demat account. Conventional MFs are bought/ sold
from/to the AMC.
4. ETFs can be traded like a stock at any time of the day and at real-time prices, while the market is open.
Whereas, one can buy MFs only at the NAV based on the closing prices.
5. The unit capital of close-ended funds (and even shares) will not change with trading. But unit capital of ETF
can change with trading and hence to that extent they behave like open-ended funds
6. There are some close-ended funds listed on the exchange. But because they are structurally different from
an ETF, they can trade at substantial discount (or premium) to the NAV. This will not be the case with ETFs.
7. Like conventional MFs, they offer the benefits of diversification
8. As financial instruments per se, ETFs are as safe as conventional MFs. But, of course, the market risk
remains.
9. In ETF, AMCs need not keep a large portion in cash to meet redemption pressures
10. Also, unless there is a huge redemption pressure, shares need not be sold to generate cash to meet the
redemptions the normal buying & selling of units amongst the investors will take care of day-to-day
redemptions. To that extent, ETFs are somewhat protected
11. In ETF each investor pays his share of costs, unlike conventional MFs where costs are deducted from the
NAV on an average basis. As such the long-term investors suffer, while short-term investors end-up paying
lesser costs in conventional MFs.

1.12.3 Benefits of investing in ETFs

Convenient to trade as it can be bought/sold on the stock exchange at any time of the day when the market
is open (index funds can be bought only at NAV based on closing prices)
One can short sell an ETF or buy on margin or even purchase one unit, which is not possible with index-
funds/conventional MFs
ETFs are passively managed, have low distribution costs and minimal administrative charges. Hence most
ETFs have lower expense ratios than conventional MFs
Not dependent on the fund manager
Like an index fund, they are very transparent

1.12.4 Disadvantages of investing in ETFs

SIP in ETF is not convenient as you have to place a fresh order every month
Also SIP may prove expensive as compared to a no-load, low-expense index funds as you have to pay
brokerage every time you buy & sell
Because ETFs are conveniently tradable, people tend to trade more in ETFs as compared to conventional
funds. This unnecessarily pushes up the costs.
You can’t automatically re-invest your dividends. Secondly, you may have to pay brokerage to reinvest
dividends in ETF, whereas dividend reinvestment in MFs is automatic and with no entry-load
Comparatively lower liquidity as the market has still not caught up on the concept

It may, therefore, be concluded that if an investor is looking for a long-term and defensive investment strategy in
equities by backing the index rather than looking at active management, ETF offers an alternative to index-based
funds. It offers trading convenience & probably lower costs than index funds. A case-to-case comparison is,
however, important as some index-funds may be cheaper. Also for SIPs, index-funds may prove better than ETFs.

However, in the absence of conventional MFs like in Gold, ETFs is but a natural and better choice than
buying/selling physical gold.

Ch -2 MARGIN TRADING AND TECCHNICAL ANALYSIS

2.1 MARGIN TRADING
Practice of buying stock with money borrowed from the broker. In this arrangement,
the investor makes a cash down payment (called the margin) with the broker and
can purchase stocks worth about twice the cash amount. The broker charges interest on this loan (in
addition to the commission on each buy/sell trade) and the investor has to keep the
entire stockholding with the broker as collateral. Also, the investor has to put up additional cash in case
the value of the stockholding falls below a certain amount. Margin trading is a double-edged sword -
it cuts both ways. If the stock price rises, the investor makes twice as much profit as with his own cash only.
Similarly, if the stock price falls, the investor loses twice the amount. In slang, this practice is called
'investing on steroids.'

Imagine this: you're sitting at the blackjack table and the dealer throws you an ace. You'd love to increase
your bet, but you're a little short on cash. Luckily, your friend offers to spot you $50 and says you can pay
him back later. Tempting, isn't it? If the cards are dealt right, you can win big and pay your buddy back his
$50 with profits to spare. But what if you lose? Not only will you be down your original bet, but you'll still
owe your friend $50. Borrowing money at the casino is like gambling on steroids: the stakes are high and
your potential for profit is dramatically increased. Conversely, your risk is also increased.

Investing on margin isn't necessarily gambling. But you can draw some parallels between margin trading
and the casino. Margin is a high-risk strategy that can yield a huge profit if executed correctly. The dark side
of margin is that you can lose your shirt and any other assets you're wearing. One of the only things riskier
than investing on margin is investing on margin without understanding what you're doing.

2.1a) Margin account
A brokerage account that allows investors to buy securities by borrowing a portion of the purchase price.
Margin accounts are governed by the National Association of Securities Dealers (NASD), the New York Stock
Exchange (NYSE) and the lending brokerage firm.

There are two ways to purchase stocks:

a) The buyer can pay the purchase price in full

b) Using a margin account. In a margin account purchase, the buyer pays a portion of the purchase price
and the broker lends the difference. The buyer in turn pays interest on the broker’s loan in addition to the
usual commission fees. For collateral, the broker holds onto the stocks. Dividends earned from the stocks

are used to help offset the interest payments.

Margin is determined by the following equation:

M is the margin, V is the market value of the securities, and L is the broker’s loan.

2.1b) The margin call

Once the trader buys a future or stocks in the margin account, the client gets the profit/loss since his
purchase in his account.

In both futures market and margin trading, if the value of the share falls below the purchase price, the
broker will make margin calls, asking the client to deposit additional margin.In a normal market, these
margin calls are not a problem as clients can deposit the additional amount easily.When clients are not able
to meet the margin requirement, the broker sells the security so that he does not have to bear the risk in
case the stock falls further.This typically become a problem when the markets fall far more than expected
and traders are not liquid enough to meet the margin calls. And when a lot of traders can't meet margin
calls, the situation snowballs.

This is what happened in the past few days when traders, who were over-leveraged could not meet the
margin calls, and their securities kept being sold.

Futures

A 'Future' is a contract to buy or sell the underlying asset for a specific price at a pre-determined time. If you
buy a futures contract, it means that you promise to pay the price of the asset at a specified time. If you sell a
future, you effectively make a promise to transfer the asset to the buyer of the future at a specified price at a
particular time. Every futures contract has the following features:

Buyer
Seller
Price

Expiry

Some of the most popular assets on which futures contracts are available are equity stocks, indices,
commodities and currency.

No delivery right now
Futures are for different kinds of requirements. For instance you may not have the money right now
to buy, but you believe the price will go up. You just buy a forward contract for a later date, and on
that date you buy and IMMEDIATELY sell, so that you will simply pocket the difference (or lose the
difference if the stock has lost money).

Short selling

Secondly, futures can be used to "short sell". If you want to sell something you should own it first,
no? But futures are different - since they are for a later date, you can sell something without owning it, and then
buy it later! So if you believe the price of an item is going down, you can SELL a forward contract. Since you don't
have to deliver it right now, the buyer does not care if you already have it or not. On the later date, just buy from
the market and give it to the buyer, pocketing (or losing) the difference.

2.2a)Margin trading vs futures

Most investors buy the futures, but there are times when margin trading makes mores sense. If a stock is
not in the futures list, the client can go for margin funding.

Since futures are generally not available beyond one or two months, if the client has a longer view, then
margin trading is better. Also, some brokers offer lower interest rates on margin trading than the prevalent rates in
the futures market.

2.2b)How Do Futures Markets Benefit Society?
The futures markets can help manage the risks that are part of doing business. This can mean lower costs to
you as a consumer, because a well-run business is usually able to bring its goods and services to market
more efficiently — at a lower cost. The fewer risks a business has to take, the lower the end price it needs
to make a profit. That’s really the free enterprise system at its best, and futures markets play a vital role in
this process.
Also, firms that manage their risks tend to be more dependable employers. If you work for a company that
deals with overseas customers or suppliers, for example, you have an interest in how well your company
copes with foreign exchange rates and how well it manages the risk of fluctuating interest rates to protect
its profits. Hedging with futures can assist with this aspect of your employer’s operations.
Naturally, if you work for a futures exchange or a firm involved in trading, futures markets are particularly
important to you. Futures markets are a part of the business scene in this country. Used knowledgeably and
appropriately, futures and options markets can be a valuable asset in the business of doing business, which

affects each of us.

2.3a)Options
An option is the right, not the obligation, to buy or sell a futures contract at a designated strike price. For
trading purposes, you buy options to bet on the price of a futures contract to go higher or lower. There are
two main types of options - calls and puts.

Calls – You would buy a call option if you believe the underlying futures price will move higher. For
example, if you expect corn futures to move higher, you will want to buy a corn call option.

Puts – You would buy a put option if you believe the underlying futures price will move lower. For example,
if you expect soybean futures to move lower, you will want to buy a soybean put option.

Premium – You are obviously going to have to pay some kind of price when you buy an option. The term
used for the price of an option is premium. You can think of the pricing of options as a bet. The bigger the
long shot, the less expensive they will be. Oppositely, the more sure the bet is, the more expensive it will
be.

Fig2.3.1

Contract Months (Time)

Options have an expiration date, which means they only last for a certain period of time. When you buy an
option, you cannot hold it forever. For example, a December corn call expires in late November. You will

need to close the position before expiration. Generally, the more time you have on an option, the more
expensive it will be.

Strike Price

This is the price at which you could buy or sell the underlying futures contract. For example, a December
$3.50 corn call allows you to buy a December futures contract at $3.50 anytime before the option expires.
Most traders do not convert options, they just close the option position and take the profits.

2.3b)How To Start Options Trading?

The easiest way to start options trading is by opening an online options trading account with a broker which
offers online options trading and then practise buying call options for stocks which you think will go up and
buying put optionsfor stocks that you think will go down. After you are completely familar with trading call
options and put options, you can then move on to the more complex option strategies. Make sure you
follow the essential Steps in Trading Options. There are currently (Dec 2010) seven exchanges in the United
States that list standardized stock options for options trading -- The Philadelphia Stock Exchange (PHLX),
American Stock Exchange (AMEX) and NYSE Arca in New York City, and the Chicago Board Options Exchange
(CBOE) which are all open-outcry marketplaces, and the International Securities Exchange (ISE), Nasdaq
Options Market (NASDAQOMX) and Boston Options Exchange (BOX) are electronic marketplaces. Anyone
can trade options in any of these options trading exchanges through any options trading brokers.

2.3c)Why Options Trading?

Successful Investors like Robert Kiyosaki and Robert G Allen have popularised options trading through the
use ofoptions strategies as part of an overall strategy to financial freedom. They preach that options trading
is the investment of the rich.

So what makes it so powerful?

Options Trading Grants Unprecedented LEVERAGE!

Yes, options trading is LEVERAGE! Trading options allows you to potentially make over 10 times more profit
on the same move in the underlying stock than if you bought the stock itself! The leverage power of options
trading is perhaps the main reason why traders with small funds choose to trade options. Even though
options was initially designed to be a hedging tool instead of a leverage tool, options trading is still a great
way to profit while risking only very little money. The Leverage effect of option trading also allows investors

to participate in the move of high priced stocks using only a small capital outlay.

Options Trading Grants Unprecedented PROTECTION!

Options trading not only grants you leverage, but it also grants you PROTECTION! When a stock moves
AGAINST you, an options trader could potentially make a lesser loss than the stock trader. Why? Because
your maximum loss is limited to the price you paid for the option which could be just 10% of the price of
the stock, or lesser! Taking our Apple example from above, the stock trader's maximum risk is $9365 while
the option trader's maximum risk is $170 for controlling the same number of Apple stocks! Indeed, options
trading need not be risky!

Options Trading Grants Unprecedented FLEXIBILITY!

Options Trading allows you to profit from every possible move in the underlying asset! Up, Down or
Stagnant, there is an option strategy that allows you to profit from that exact move. In Options trading, an
options trader can easily participate in a downwards move on a stock through buying a put option without
having to risk margin calls by going short the underlying stock or futures.

Yes, there are even times when stock trading is riskier than option trading! Read about How Stocks Can Be
Riskier Than Options. This is also why I wrote this options trading tutorials site to teach the world about this
wonderful trading instrument.

Fig 2.3c.1

# Futures

Entry type: Buy
Direction: Up
Trade type: Long
Entry type: Sell
Direction: Down
Trade type: Short

# Options

Entry type: Call
Direction: Up
Trade type: Long
Entry type: Put
Direction: Down
Trade type: Long

2.4Technical analysis
It is research of market dynamics that is done mainly with the help of charts and with the purpose of
forecasting future price development. Technical analysis comprises several approaches to the study of price
movement which are interconnected in the framework of one harmonious theory. This type of analysis
studies the price movement on the market by means of analyzing three market factors: price, volumes, and,
in case of study of futures contracts’ market, of an open interest (number of open positions). Of these three
factors the primary one for technical analysis is the prices, while the alterations in other factors are studies
mainly in order to confirm the correctness of the identified price trend. This technical theory, just like any
theory, has its core postulates.

Technical analysts base their research on the following three axioms:

1) Market movement considers everything
This is the most important postulate of technical analysis. It is crucial to understand it in order to grasp
rightly the procedures of analysis. The gist of it is that any factor that influences the price of securities,
whether economic, political, or psychological, has already been taken into account and reflected in the
price chart. In other words, every price change is accompanied by a change in external factors. The main
inference of this premise is the necessity to follow closely the price movements and analyze them. By
means of analyzing price charts and multiple other indicators, a technical analyst comes to the point that
the market itself shows to her/him the trend it will most likely follow.
This premise is in conflict with fundamental analysis where the attention is primarily paid to the study of
factors, and later on, after the analysis of the factors, to conclusions as to the market trends are made.
Thus, if the demand is higher than the supply, a fundamental analyst will come to the conclusion that the
price will grow. Technical analyst, however, makes her/his conclusions in the opposite sequence: since the
price has grown, it means the demand is higher than the supply.

2) Price moves with the trend
This assumption is the basis for all methods of technical analysis, as a market that moves in accordance
with trends can be analyzed, unlike a chaotic market. The postulate that the price movement is a result of a
trend has two effects. The first one implies that the current trend will most likely continue and will not
reverse itself, thus, excluding disorderly chaotic movement of the market. The second one implies that the
current trend will go on until the opposite trend sets in.

3) History repeats itself
Technical analysis and studies of market dynamics are closely related to the studies of human psychology.
Thus, the graphical price models identified and classified within the last hundred years depict core
characteristics of the psychological state of the market. First of all, they show the moods currently pre
vailing in the market, whether bullish or bearish. Since these models worked in the past, we have reasons to
suppose that they will work in the future, for they are based on human psychology which remains almost
unchanged over years. We can reword the last postulate — the story repeats itself — in a slightly different .

2.4a)Timeframes

Regardless of the "timeframes" of the data in your charts (i.e., hourly, daily, weekly, monthly, etc.), the
basic principles of technical analysis endure. Opportunities exist in any time frame. But customized settings
of the technical analysis tools are needed for each time period.
On the weekly chart, the scale interval on the time axis is one week. On the monthly chart, correspondingly,
every bar shows price behavior for one complete month. It is obvious that in order to cover a longer period
of time and to be able to analyze long-term trends, one has to compress the price behavior. A weekly chart,
for example, can cover a period of five years and more, the monthly chart can cover twenty years or more.
This is how the analyst manages to see far ahead of her-/himself and that is how s/he can assess the market
in terms of the long-termopportunities, which are really valuable while conducting the technical analysis.
It is wise to start by analyzing long-term charts and then move slowly to short-term charts. There is less
"noise" on the long periods, that is why graphic models, basic trend lines and different levels of support or
resistance are seen more clearly. This accounts for the type of work with data time periods. If we start
studying short-term market, later on, as the volume of analyzed data expands, we will have to reconsider
the conclusions several times at least. In the long run, short-term results may even change completely
after long-term charts have been studied. If we start analyzing longer periods first, we can establish where
the market is in terms of a long-term perspective. After that, we could then turn to chart studies which
cover shorter periods of time. That is how an analyst goes from "macro" to "micro" analysis. At the final
stage of the analysis, we determine the point of "entry into the market", i.e., the point of opening a
position. The shorter the last analysis stage is, the more precisely one can determine this entrance point.

2.4b)Equidistant Channel

Equidistant Channel represents two parallel trend lines connecting extreme maximum and minimum close
prices. Market price jumps, draws peaks and troughs forming the channel in the trend direction. Early
identification of the channel can give a valuable information including that about changes in the trend
direction what allows to estimate possible profits and losses. It is necessary to give the direction of the
channel and its width to build the instrument.

Fig 2.4b.1

2.4c)Support and Resistance

Think of prices for financial instruments as a result of a head-to-head battle between a bull (the buyer) and
a bear (the seller). Bulls push prices higher, and bears lower them. The direction prices actually move shows
who wins the battle.
Support is a level at which bulls (i.e., buyers) take control over the prices and prevent them from falling
lower.
Resistance, on the other hand, is the point at which sellers (bears) take control of prices and prevent them
from rising higher. The price at which a trade takes place is the price at which a bull and bear agree to do
business. It represents the consensus of their expectations.
Support levels indicate the price where the most of investors believe that prices will move higher.
Resistance levels indicate the price at which the most of investors feel prices will move lower.
But investor expectations change with the time, and they often do so abruptly. The development of support
and resistance levels is probably the most noticeable and reoccurring event on price charts. The breaking
through support/resistance levels can be triggered by fundamental changes that are above or below
investor's expectations (e.g., changes in earnings, management, competition, etc.) or by self-
fulfilling prophecy (investors buy as they see prices rise). The cause is not so significant as the effect: new
expectations lead to new price levels. There are support/resistance levels, which are more emotional.

Fig2.4c.1 2.4

Resistance becomes support

When a resistance level is successfully broken through, that level becomes a support level. Similarly, when a
support level is successfully broken through, that level becomes a resistance level.
The reason for it is that a new "generation" of bulls appears, who refused to buy when prices were low.
Now they are anxious to buy at any time the prices return to the previous level. Similarly, when prices drop
below a support level, that level often becomes a resistance level that prices have a difficult time breaking
through. When prices approach the previous support level, investors seek to limit their losses by selling.

2.4d)Trendlines

Trendlines are widely used in technical analysis. But it should be noted that there is not consensus of
opinions about methods of their building and interpreting. So nobody is surprised at the fact that different
analysts using identical data of the same time period draw absolutely different trendlines.

A trendline is a straight line that connects two important minimum or maximum points in the chart. Any
amount of secondary and small trends can be found within the main trend. their lengths can vary within a
rather wide range. It should be noted that a trendline should not intersect other prices between these two
points. A trendline represents a resistance or support pass-through where price changes within the range of
the pass-through.

The trendlines can be categorized as follows:

1) Downtrend is characterized through sequential decreasing of maximum prices. It can also be considered
as descending resistance level: Bears set the pace as they push prices down.

2) Uptrend is characterized through sequential increasing of minimum prices. It can also be considered as
ascending support level: Bulls set the pace as they push prices up.

3) Sideways Trend - price does not practically move at all.

Fig2.4d.1

Trendlines can be categorized by their importance using the five indications below:

1) time scale: the larger is the time scale, the more important is the trendline. The trendline in the weekly
chart shows a more important trend than that in the daily chart, and the latter show a more important
trend than the trendline in the 1-hour chart.
2) length: the longer is the trendline, the more reliable it is. The short trendline displays the behavior of
masses within a short time interval, and a longer trendline displays their behavior within a longer period
of time;
3) how many times prices touch the trendline: the more is the count of touches, the more reliable is the
trendline. A preliminary trendline is drawn through only two points, sp the third point makes it more
reliable and four or five points show that the group prevailing in the market at this moment has a
significant potential.
4) slope angle: the angle between the trendline and the horizontal line reflects the intensity of emotions
among the prevailing market crowd. An abrupt trendline means that the prevailing crowd is dynamic,
and a relatively flat trendline means that the prevailing crowd is rather inert. A flat trend usually

develops longer;

5) volume of transactions: it reflects how serious the players are, as well as the count of participants
interested in retaining the existing trend. The increased Volume usually serves as confimation of the
preceding trend.

To draw a trendline, it is enough to have two points it to be drawn through, and one more point "to
confirm" the trend. The trendline exists until it is broken through due to a price flick up or down. The
"dog-legs" in trendlines are relatively rare. If there is no consolidation, the longer it does not happen,
the sharper is the subsequent turn.

2.4e)Moving Averages

Moving averages are one of the oldest and most popular technical analysis tools. A moving average is the
average price of a financial instrument over a given time. When calculating a moving average, you specify
the time span to calculate the average price. For example, it could be 25 days.

Fig2.4e.1

A "simple" moving average is calculated by adding the instrument prices for the most recent "n" time
periods and then dividing by "n". For instance, adding the closing prices of an instrument for most recent 25
days and then dividing by 25. The result is the average price of the instrument over the last 25 days. This
calculation is done for each period in the chart.
Note that a moving average cannot be calculated until you have "n" time periods of data. For example, you
cannot display a 25-day moving average until the 25th day in a chart.

The moving average represents the consensus of investor’s expectations over the indicated period of time.
If the instrument price is above its moving average, it means that investor’s current expectations (i.e., the
current price) are higher than their average ones over the last 25 days, and that investors are becoming
increasingly bullish on the instrument. Conversely, if today’s price is below its moving average, it shows that
current expectations are below the average ones over the last 25 days.
The classic interpretation of a moving average is to use it in observing changes in prices. Investors typically
buy when the price of an instrument rises above its moving average and sell when the it falls below its
moving average.

Ch-3 Factors affecting market
Trends are what allow traders and investors to capture profits. Whether on a short- or long-term time frame, in an
overall trending market or ranging environment, the flow from one price to another is what creates profits and
losses. There are four major factors that cause both long-term trends and short-term fluctuations.

1. Governments: Fiscal and monetary policy have a profound effect on the financial marketplace. By altering interest
rates and the amount of dollars available on the open market, governments can change how much investment flows
into and out of the country.
2. International Transactions: The flow of funds between countries impacts the strength of a country's economy and
its currency. Countries that export continually bring money into their countries. This money can then be reinvested
and can stimulate the financial markets within those countries.
3. Speculation and Expectation: Consumers, investors and politicians belief where the economy will go in the future
impacts how we act today. Expectation of future action is dependent on current acts and shapes both current and
future trends. Sentiment indicators are commonly used to gauge how certain groups are feeling about the current
economy. Analysis of these indicators as well as other forms of fundamental and technical analysis can create a
bias or expectation of future price rates and trend direction.
4. Supply and Demand: Supply and demand for products, currencies and other investments creates a push-pull
dynamic in prices. Prices and rates change as supply or demand changes. If something is in demand and supply
begins to shrink, prices will rise. If supply increases beyond current demand, prices will fall. If supply is relatively
stable, prices can fluctuate higher and lower as demand increases or decreases.

Effect on Short- and Long-Term Trends due to above factors:
1. Government: Government news releases, such as proposed changes in spending or tax policy, as well as Federal
Reserve decisions to change or maintain interest rates can have a dramatic effect on long term trends. Lower
interest rates and taxes encourage spending and economic growth. This has a tendency to push market prices
higher, but the market does not always respond in this way because other factors are also at play. Higher interest
rates and taxes, for example, deter spending and result in contraction or a long-term fall in market prices.
In the short term, these news releases can cause large price swings as traders and investors buy and sell in response
to the information. Increased action around these announcements can create short-term trends, while longer term
trends develop as investors fully grasp and absorb what the impact of the information means for the markets.

2. The International Effect: International transactions, balance of payments between countries and economic strength
are harder to gauge on a daily basis, but they play a major role in longer-term trends in many markets. The
currency markets are a gauge of how well one country's currency and economy is doing relative to others. A high
demand for a currency means that currency will rise relative to other currencies.
The value of a country's currency also plays a role in how other markets will do within that country. If a country's
currency is weak, this will deter investment into that country, as potential profits will be eroded by the weak
currency.

3. The Participant Effect: The analysis and resultant positions taken by traders and investors based on the information

they receive about government policy and international transactions create speculation as to where prices will
move. When enough people agree on direction, the market enters into a trend that could sustain itself for many
years.
Trends are also perpetuated by market participants who were wrong in their analysis; being forced to exit their
losing trades pushes prices further in the current direction. As more investors climb aboard to profit from a trend,
the market becomes saturated and the trend reverses, at least temporarily.

4. The S & D Effect: This is where supply and demand enters the picture. Supply and demand affects individuals,
companies and the financial markets as a whole. In some markets, such as the commodity markets, supply is
determined by a physical product. Supply and demand for oil is constantly changing, adjusting the price a market
participant is willing to pay for oil today and in the future.
As supply dwindles or demand increases, a long-term rise in oil prices can occur as market participants outbid one
another to attain a seemingly finite supply of the commodity. Suppliers want a higher price for what they have, and
a higher demand pushes the price that buyers are willing to pay higher.
All markets have a similar dynamic. Stocks fluctuate on a short and long-term scale, creating trends. The threat of
supply drying up at current prices forces buyers to buy at higher and higher prices, creating large price increases. If
a large group of sellers were to enter the market, this would increase the supply of stock available and would likely
push prices lower. This occurs on all time frames.

Other factors affecting markets:
1. Policies:
Foreign direct investment (FDI) is direct investment into production in a country by a company in another
country, either by buying a company in the target country or by expanding operations of an existing business in
that country. Foreign direct investment is done for many reasons including to take advantage of cheaper wages,
special investment privileges such as tax exemptions offered by the country as an incentive to gain tariff-free
access to the markets of the country or the region.

in regard to the national income equation Y=C+I+G+(X-M), I is investment plus foreign investment, FDI refers to
the net inflows of investment(inflow minus outflow) to acquire a lasting management interest (10 percent or more
of voting stock) in an enterprise operating in an economy other than that of the investor. It is the sum of equity
capital, other long-term capital, and short-term capital as shown the balance of payments. It usually involves
participation in management, joint-venture, transfer of technology and expertise. There are two types of FDI:
inward and outward, resulting in a net FDI inflow (positive or negative) and "stock of foreign direct investment",
which is the cumulative number for a given period.

Global overview of foreign direct investment
The United Nations Conference on Trade and Development said that there was no significant growth of global FDI
in 2010. In 2010 was $1,122 billion and in 2009 was $1,114 billion. The figure was 25 percent below the pre-crisis
average between 2005 and 2007
Foreign direct investment in India
Starting from a baseline of less than $1 billion in 1990, a recent UNCTAD survey projected India as the second
most important FDI destination (after China) for transnational corporations during 2010–2012. As per the data, the
sectors that attracted higher inflows were services, telecommunication, construction activities and computer
software and hardware. Mauritius, Singapore, US and UK were among the leading sources of FDI. According
to Ernst & Young, FDI in India in 2010 was $44.8 billion and in 2011 experienced an increase of 13% to $50.8
billion. India has seen an eightfold increase in its FDI in March 2012. India disallowed overseas corporate bodies
(OCB) to invest in India.

2012 FDI reforms
On 14 September 2012, Government of India allowed FDI in aviation up to 49%, in the broadcast sector up to
74%, in multi-brand retail up to 51% and in single-brand retail up to 100%.The choice of allowing FDI in multi-
brand retail upto 51% has been left to each state.

In its supply chain sector, the government of India had already approved 100% FDI for developing cold chain.
This allows non-Indians to now invest with full ownership in India's burgeoning demand for efficient food supply
systems. The need to reduce waste in fresh food and to feed the aspiring demand of India's fast developing
population has made the cold supply chain a very exciting investment proposition. Foreign investment is
announced by the government of India as FEMA (Foreign Exchange Management Act).

SWOT Analysis of FDI in Retail

STRENGTHS WEAKNESSES

• Retail is a $450bn Industry in India. • High capital investment required
• Young and dynamic manpower in the retail sector (real estate)
• Highest shop density in the world • Lack of trained and educated
• High growth rate in retail & work force
Whole-sale trade • Higher prices as compared to
• Presence of big industrial houses local shops
with deep pock. • Will mainly cater to high-end
consumers placed in metros

OPPORTUNITIES THREATS:

• High employment generation in • Effect on the small retailers - local
the future Kirana stores (mom-pop stores)
• Will enhance financial condition of • Long gestation period - Foreign
farmers Retailers will take a while to adapt
• Encourage foreign capital inflows to India and generate profits
• Result in increasing supply-chain • States not buying in so
efficiency efficiencies expected may not be
• Improve Logistics & Infrastructure achieved.

Fdi review from Indian perspective:
1. There is clearly an opportunity for the Domestic Giants, Kirana Stores and the Foreign Retailers to co-exist in
India
2. The Wal-Mart model, offers every-day low pricing, but are typically in far-off locations, have a homogenous
selection of products across their stores, typically need 150,000 sq feet of space and require a car to get to. India is
years away from when majority of its population will have the ability to only shop at the Wal-Marts of the world.
People will still shop there for proximity, comfort of relationship and easy credit.
3. Foreigners will bring to India their expertise and efficiency in retailing, they will invest capital in improving
logistics and infrastructure in India (for example: Cold Storage Logistics is still almost non-existent in India) and
share technology and know-how with their local Indian Partners, but will also be able to become profitable over a
period of time as their brands and presence increase across the country.
4. On the whole, if India has to grow it needs capital, training and innovation. Yes the short-term effects of the
announced reforms will be painful, but in the long-term if they will help make Retail a more organized industry in
India, provide better quality goods at cheaper prices at convenient locations, improve infrastructure and the supply
chain mechanism throughout the country, provide employment and retail sector specific training to a large
population it will be a huge boon to the nation.

II) World market:

1. Global recession:
A recession is a decline in a country's Gross Domestic Product (GDP) growth for two or more consecutive quarters
of a year. A recession normally takes place when consumers lose confidence in the growth of the economy and
spend less. This leads to a decreased demand for goods and services, which in turn leads to a decrease in
production, lay-offs and a sharp rise in unemployment. Investors spend less as they fear stocks values will fall and
thus stock markets fall on negative sentiment.
According to the U.S. National Bureau of Economic Research (the official arbiter of U.S. recessions) the recession
began in December 2007 and ended in June 2009.[12][13] US mortgage-backed securities, which had risks that were
hard to assess, were marketed around the world. The emergence of sub-prime loan losses in 2007 began the crisis
and exposed other risky loans and over-inflated asset prices. With loan losses mounting and the fall of Lehman
Brothers on September 15, 2008, a major panic broke out on the inter-bank loan market. As share and housing
prices declined, many large and well established investment and commercial banks in the United States
and Europe suffered huge losses and even faced bankruptcy, resulting in massive public financial assistance.
A global recession has resulted in a sharp drop in international trade, rising unemployment and slumping
commodity prices. In December 2008, the National Bureau of Economic Research (NBER) declared that the
United States had been in recession since December 2007.[16] Several economists predicted that recovery might not
appear until 2011 and that the recession would be the worst since the Great Depression of the 1930s.

Causes:
The origin has been focused on the respective parts played by the public monetary policy (in the US notably) and
by the practices of private financial institutions. In the U.S., mortgage funding was unusually decentralized,
opaque, and competitive, and it is believed that competition between lenders for revenue and market share
contributed to declining underwriting standards and risky lending.
Some economists have claimed that the ultimate point of origin of the financial crisis of 2007–2010 can be traced
back to an extremely indebted US economy. High private debt levels also impact growth by making recessions
deeper and the following recovery weaker.
Impact:
Indian stock market crashed from the high of 20000 to a low of around 8000 points during the year 2008-2009.
Corporate performance of most of the companies remained subdued, and the impact of moderation in demand was
visible in the substantial deceleration during the said years. Corporate profitability also exhibited negative growth,
which has led to the bearish trend in the stock market. Recession has effected the investments made by Foreign
Institutional Investors (FIIs) in the Indian Stock Market as FIIs started disinvesting to meet their commitments
abroad. This is putting lot of pressure on domestic financial system, which has led to liquidity crunch in all major
sectors of the country. 2008 was a bad year for the markets as the Sensex reported some of its major falls during
that year. This owed to the global recession of 2008. Some of the biggest falls of sensex are:

•18th May, 2006 – Massive sell off by FIIs, retail investors and an overall weak global sentiment led to a 826 point
fall in the Sensex, which closed at 11,391 points.

r• 21 January, 2008 — This day marked the highest fall in the history of Sensex as it declined 1,408 points on the
back of investors selling owing to fears about fears that the US may be headed for a recession.

• 22 January, 2008 – Sensex declined by 875 points to close at 16,729 points. Trading was suspended for an hour
at the BSE as crashed by 10 percent.

•11th Feb, 2008 – Sensex declined by 833 points to close at 16,630.9 points.

• 3 March, 2008 — Major sell off by funds, budget related concerns and fears about the US heading for a recession

led to a 900 points in Sensex to 16,677 points.

•13th Mar, 2008 – The BSE Sensex declined by 770 points to close at 15,357 points.

• 17 March, 2008 — The Sensex crashed 951 points to close at 14,809 points on concerns about global markets

•10th Oct, 2008 – Sensex closed at 10,527.85 points, lower by 800 points.

• 24 October, 2008 — Markets declined 1070 points to close at 8701 points as the RBI left key interest rates
unchanged and lower the GDP target to 7-5 percent for 2008-09.

2. Inflation:
Inflation is a state in the economy of a country, when there is a price rise of goods as well as services. To meet
the required price rise, individuals have to shell out more than is presumed. Ranging from unemployment,

interest rates, exchange rates, investment, stock markets, there is an aftermath of inflation in every sector.
Inflation and stock market have a very close association. If there is inflation, stock markets are the worst
affected.

Prices of stocks are determined by the net earnings of a company. It depends on how much profit, the company
is likely to make in the long run or the near future. If it is reckoned that a company is likely to do well in the years
to come, the stock prices of the company will escalate. On the other hand, if it is observed from trends that the
company may not do well in the long run, the stock prices will not be high. In other words, the prices of stocks
are directly proportional to the performance of the company. In the event when inflation increases, the company
earnings (worth) will also subside. This will adversely affect the stock prices and eventually the returns.
Effect of inflation on stock market is also evident from the fact that it increases the rates if interest. If the
inflation rate is high, the interest rate is also high. In the wake of both (inflation and interest rates) being high,
the creditor will have a tendency to compensate for the rise in interest rates. Therefore, the debtor has to avail
of a loan at a higher rate. This plays a significant role in prohibiting funds from being invested in stock markets.
When the government has enough funds to circulate in the market, the cost of goods, services usually go up. This
leads to the decrease in the purchasing power of individuals. The value of money also decreases. In a nut shell,
for the economy to flourish, inflation and stock market ought to be more conforming and predictable.

Inflation and its Effects on Investments
Example - Our grandfather is to say that in one rupee he was doing shopping for whole month and now days you
require minimum RS 10000 for your entire month. This rising prices year after year is called effect of Inflation.
And this is reason the earning of common man has also increased from Rs 50 to 100 in older days to Rs 5000 to
10000.In other words inflation reduces the price of money, the movie ticket which was available for 50 paisa in
olden days now have become RS 50.
Every week on Friday government declares rate of Inflation. (In current policy they have changed it to every
month)Suppose if price of one kg sugar is Rs.100 this year and next year the price becomes approximately Rs.106
then the rate of inflation is 6%.

What is rate of return?
The rate of return is nothing but how much you earn on your investment.
For example - If you invest Rs.500 in stock market and after one year you make profit of RS 100 then your rate of
return is 20%. So, when you make an investment, make sure that your rate of return on the investment is higher
than the rate of inflation.

What is the Conclusion?
If you invest Rs.100 in the market today and you make money at a 5% "rate of return" in one year then you will
have Rs.105. But if the rate of inflation remains at 7%, then an item costing today for Rs.100 will cost Rs.107 a
year from now.
So what you can buy with today‘s Rs.100 will be available for Rs.107 a year from now but your earning is Rs 106.
So the conclusion is you are losing the money.

So what to conclude from this Inflation

1) If you are seeking good wealthy future then it is not advisable to keep your money in safe locker but do safe
investing because if you just keep putting your money in locker then it will loose its value as year passes.
For example if you keep Rs.5000 in your locker today and you keep it there for 15 years or 20 years then there are

quit possibilities that your RS 5000 could become worth Rs. 500.

2) If it is getting difficult for you to decide where to invest then you can put in at least in bank and let it grow by
earning interest year after year.

3) When investing, you have to make sure that the rate of return on your investment is higher than the rate of
inflation though inflation control is not in your hand.

3. Deflation:
Deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate
falls below 0% (a negative inflation rate). This should not be confused with disinflation, a slow-down in the
inflation rate (i.e. when inflation declines to lower levels).Deflation increases the real value of money – the
currency of a national or regional economy. This allows one to buy more goods with the same amount of money
over time. While deflation sounds like it should be welcomed by investors, it actually causes a drop in the stock
market because investors perceive deflation as the result of a weak economy. Economists generally believe that
deflation is a problem in a modern economy because they believe it may lead to a deflationary spiral.
Historically not all episodes of deflation correspond with periods of poor economic growth. Deflation occurred in
the U.S. during most the 19th century (the most important exception was during the Civil War). This deflation was
caused by technological progress that created significant economic growth

The effects of deflation are:
1. Decreasing nominal prices for goods and services
2. Increasing buying power of cash money and all assets denominated in cash terms
3. May decrease investment and lending if cash holdings are seen as preferable (aka hoarding)
4. Benefits recipients of fixed incomes

III) Schemes:
Rajiv Gandhi equity saving scheme:
Rajiv Gandhi Equity Saving scheme was introduced in the budget (2012-13) this year by the Finance Minister.
This is first of its kind scheme in India which allows the retail investor to invest upto Rs.50000 directly into equity
shares and avail tax benefit on 50% percent of investment made directly into equity shares. Some of the conditions
put under the scheme to avail tax benefits are:
1) The investor should have income of less than Rs. 10 lakhs in a year,
2) The benefit under the scheme will be given to the first time investors into equity market only.
3) Investments will be subjected to lock-in period of three years and

4) If the assessee has claimed and has been allowed a deduction under this section for any assessment year in
respect of any amount, he shall not be allowed any deduction under this section for any subsequent assessment
year. This is as per Section 80CCG.
5) The RGESS would cover stocks listed under BSE 100, CNX 100 and Navratna, Maharatna and Miniratna public
sector firms.

The scheme, which was announced in the Union Budget, is supposed to help bring back retail investors into the
stock market, and more importantly make stock investment more attractive from gold purchases which results in
higher forex outflow. Unlike the previous finance minister‘s realm, which was opposed to allowing mutual funds
in the scheme, RGESS has been extended to mutual funds as well.

One of the prime concerns of mutual fund houses was that under the Direct Taxes Code, equity-linked savings
schemes (ELSS) are expected to go out of Section 80C. Therefore, there are no incentives for the investor to put in
money into equity schemes. The introduction of RGESS will partly offset the adverse impact. But ELSS, for some
time now, has been doing quite badly. In the last four calendar years, net collections from these schemes have been
falling consistently – from Rs 5,642 crore in 2008 to Rs 813 crore in 2011. In 2012, the net flows stand at Rs -132
crore, implying outflows.
The scheme, itself, has very few benefits. Investors whose annual income is less than Rs 10 lakh can invest up to
Rs 50,000 and get a deduction of 50 per cent of the investment. So, if you invest Rs 50,000, you can claim a tax
deduction of Rs 25,000 (50 per cent of Rs 50,000).
By capping it for investors whose incomes are less than Rs 10 lakh, a person in the 20 per cent tax bracket can get
this benefit. And the maximum benefit will be Rs 5,000 (20 per cent of Rs 25,000).
On the other hand, under ELSS, the entire amount (up to the limit Rs 1 lakh) was tax deductible. Two, ELSS gives
benefits to investors of all income levels. By restricting the income level, the government is actually not giving
benefits to the high income bracket – people who are more comfortable with equities as an investment. But, I
guess, the tax benefit is not enough to attract them anyway. Allowing mutual funds in the scheme is important
because no one wants retail investors to get influenced by tips and lose money. This will drive, not only them but
their friends from the market, for a long time. RGESS, along with Sebi‘s recent guidelines for mutual funds which
allows for a higher expense ratio if money is collected from centres beyond the top 15 cities, will help develop
equities.
But, a better option perhaps would be to allow NPS or EPF to invest in market more aggressively (not just 50 per
cent in ETFs as has been mandated in the NPS).

IV) Various scams:
a) Harshad Mehta scam:
Harshad Shantilal Mehta was a convicted stockbroker of his time. Mehta was convicted by Bombay High
Court and Supreme Court of India for ripping higher profits from stock market and trading, and for his infamous
financial scandal, worth of 5,000 crore (US$945 million) in Bombay Stock Exchange (BSE), of 1992. He
was tried for 9 years, until he died in the late 2001.

1992 security scam

On April 23, 1992, journalist Sucheta Dalal exposed Mehta's illegal methods in a column in The Times of India.
Mehta was dipping illegally into the banking system to finance his buying. The authors explain:
―The crucial mechanism through which the scam was affected was the ready forward (RF) another. Crudely put,
the bank lends against government securities just as a pawnbroker lends against jeweller. The borrowing bank
actually sells the securities to the lending bank and buys them back at the end of the period of the loan, typically at
a slightly higher price.‖

It was this ready forward deal that Mehta and his accomplices used with great success to channel money from the
banking system.
Making of 1992 security scam
A typical ready forward deal involved two banks brought together by a broker in lieu of a commission. The broker
handles neither the cash nor the securities, though that wasn‘t the case in the lead-up to the scam. In this settlement
process, deliveries of securities and payments were made through the broker. That is, the seller handed over the
securities to the broker, who passed them to the buyer, while the buyer gave the cheque to the broker, who then

made the payment to the seller. In this settlement process, the buyer and the seller might not even know whom
they had traded with, either being known only to the broker. This the brokers could manage primarily because by
now they had become market makers and had started trading on their account. To keep up a semblance of legality,
they pretended to be undertaking the transactions on behalf of a bank.

Another instrument used was the Bank receipt (BR). In a ready forward deal, securities were not moved back and
forth in actuality. Instead, the borrower, i.e., the seller of securities, gave the buyer of the securities a BR. As the
authors write, a BR ―confirms the sale of securities. It acts as a receipt for the money received by the selling bank.
Hence the name - bank receipt. It promises to deliver the securities to the buyer. It also states that in the mean time,
the seller holds the securities in trust of the buyer.‖

Having figured out his scheme, Mehta needed banks which issued fake BRs (Not backed by any government
securities). ―Two small and little known banks - the Bank of Karad (BOK) and the Metropolitan Co-operative
Bank (MCB) - came in handy for this purpose. These banks were willing to issue BRs as and when required, for a
fee,‖ the authors point out. Once these fake BRs were issued, they were passed on to other banks and the banks in
turn gave money to Mehta, assuming that they were lending against government securities when this was not really
the case. This money was used to drive up the prices of stocks in the stock market. When time came to return the
money, the shares were sold for a profit and the BR was retired. The money due to the bank was returned.

This went on as long as the stock prices kept going up, and no one had a clue about Mehta‘s operations. Once the
scam was exposed, though, a lot of banks were left holding BRs which did not have any value - the banking
system had been swindled of a whopping 4,000 crore (US$756 million). When the scam was revealed, the
Chairman of the Vijaya Bank committed suicide by jumping from the office roof. He knew that he would be
accused if people came to know about his involvement in issuing checks to Mehta.
Impact of scam:
Index fell from 4500 to 2500 and lead to loss of Rs.1,00000 crore in market.
All the banks and financial institution start demanding to return the funds.
Shares were tainted.
Genuine investors fell like robbed, chaotic condition in the stock market.
Government Liberalization policies on hold.
SEBI postponed sanctioning of private sector mutual fund
Direct effect on FDI ,as entry of foreign pension funds and mutual funds becomes rare.
The Euro-issues planned by several Indian companies were delayed.
Adversely affect 15 major commercial banks of India, foreign banks and NHB(national housing bank)
When the scam was revealed, the Chairman of the Vijaya Bank committed suicide by jumping from the office
roof, because of his active involvement in issuing cheques to Mehta.

b) Satyam scam:
The Satyam Computer Services scandal was a corporate scandal that occurred in India in 2009 where
Chairman Ramalinga Raju confessed that the company's accounts had been falsified.
On 10 January 2009, the Company Law Board decided to bar the current board of Satyam from functioning and
appoint 10 nominal directors. ICAI issued show-cause notice to Satyam's auditor PricewaterhouseCoopers (PwC)
on the accounts fudging.

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