Stock Market Operations

Securities
Securities are tradable financial instruments representing ownership (like stocks)
or debt (like bonds). They are issued by companies or governments to raise
capital and can be traded on public exchanges or over-the-counter.
1. Equity securities
Equity almost always refers to stocks and a share of ownership in a company
(which is possessed by the shareholder). Equity securities usually generate
regular earnings for shareholders in the form of dividends. An equity security
does, however, rise and fall in value in accord with the financial markets and the
company’s fortunes.
2. Debt securities
Debt securities differ from equity securities in an important way; they involve
borrowed money and the selling of a security. They are issued by an individual,
company, or government and sold to another party for a certain amount, with a
promise of repayment plus interest. They include a fixed amount (that must be
repaid), a specified rate of interest, and a maturity date (the date when the total
amount of the security must be paid by).
Bonds, bank notes (or promissory notes), and Treasury notes are all examples of
debt securities. They all are agreements made between two parties for an
amount to be borrowed and paid back – with interest – at a previously-
established time.
3. Derivatives
Derivatives are a slightly different type of security because their value is based
on an underlying asset that is then purchased and repaid, with the price,
interest, and maturity date all specified at the time of the initial transaction.
4. Hybrid Securities
A hybrid security is a single financial security that combines two or more
different financial instruments. Hybrid securities, often referred to as "hybrids,"
generally combine both debt and equity characteristics.

Returns
In the context of finance and investment, the concept of return refers to the
profit or loss generated from an investment over a specific period. It represents
the change in value of an investment, often expressed as a percentage of the
initial investment. Returns can be positive (gains) or negative (losses), and they
are crucial for evaluating the performance of investments and making informed
financial decisions.

Risk
Risk, in financial terms, is the chance that an outcome or an investment's actual
gains will differ from an expected outcome, usually leaving one worse off. Risk
includes the possibility of losing some or all of an original investment.
Types of Financial Risk
1. Business Risk
Business risk refers to the basic viability of a business—the question of
whether a company will be able to make sufficient sales and generate sufficient
revenues to cover its operational expenses and turn a profit. It is concerned
with all the other expenses a business must cover to remain operational and
functioning.
[Link] Rate Risk
Interest rate risk is the risk that an investment's value will change due to a
change in the absolute level of interest rates. This type of risk affects the value
of bonds more directly than stocks and is a significant risk to all bondholders.
As interest rates rise, bond prices in the secondary market fall—and vice versa.
[Link] Risk
Political risk is the risk that an investment’s returns could suffer because of
political instability or changes in a country. This type of risk can stem from a
change in government, legislative bodies, other foreign policy makers, or
military control.
[Link] Risk
Counterparty risk is the likelihood or probability that one of those involved in a
transaction might default on its contractual obligation. Counterparty risk can
exist in credit, investment, and trading transactions, especially for those
occurring in over-the-counter (OTC) markets.
5. Liquidity Risk
Liquidity risk is associated with an investor’s ability to transact their investment
for cash.10 Typically, investors will require some premium for illiquid assets,
which compensates them for holding securities over time that cannot be easily
liquidated.
[Link]-Exchange Risk
When investing in foreign countries, it’s important to consider the fact that
currency exchange rates can change the price of the asset as well. Foreign
exchange risk (or exchange rate risk) applies to all financial instruments that are
in a currency other than your domestic currency.

Risk and Diversification

The most basic—and effective—strategy for minimizing risk is diversification.
A well-diversified portfolio will consist of different types of securities from
diverse industries that have varying degrees of risk and correlation with each
other’s returns.
Development of the Securities Market
• The Indian securities market dates to the eighteenth century, when the
securities of the East India Company were traded in Mumbai and
Kolkata. However, the orderly growth of the capital market began with
the setting up of the Bombay Stock Exchange in July 1875 and
Ahmedabad Stock Exchange in 1894. Eventually, 22 other exchanges in
various cities were set up.
• To realize national aspirations and keep pace with the changing times,
the securities market in India has gone through various stages of
liberalization, bringing about fundamental and structural changes in the
market’s design and operation. These changes have resulted in broader
investment choices and a drastic reduction in transaction costs.
Efficiency, transparency, and safety have also increased integration with
the global markets. The opening up of the economy for investment and
trade, the dismantling of administered interest and exchange rates
regimes, and setting up of sound regulatory institutions have facilitated
these changes.
• The largest stock market in India is the National Stock Exchange (NSE). It
was established in 1994 and has become the leading financial exchange
in India.
• The Bombay Stock Exchange (BSE) is the oldest stock market in India,
established in 1875.
• Nifty (National Stock Exchange Fifty) represents 50 major stocks listed
on the National Stock Exchange. Nifty is made up of 50 selected stocks
from the top 50 firms that are used to calculate the index
• Sensex (Sensitive Index) tracks the performance of 30 large-cap stocks
on the Bombay Stock Exchange. Sensex is made up of 30 selected stocks
from the top 30 companies that are used to calculate the index.
Primary Market
The primary market serves as the gateway for companies and governments to
access the necessary funds for their operations and growth. This is
accomplished by issuing and selling new securities, such as stocks and bonds,
to investors. A market is primary if the proceeds of sales go to the issuer of the
securities sold. Buyers buy securities that were not previously traded.

Functions of Primary Market:-

• New Issue Offer
The primary market organises offer of a new issue which had not been traded
on any other exchange earlier. Due to this reason, it is also called a New Issue
Market.
Organising new issue offers involves a detailed assessment of project viability,
among other factors. The financial arrangements for the purpose include
considerations of promoters’ equity, liquidity ratio, debt-equity ratio and
requirement of foreign exchange.
• Underwriting Services
Underwriting is an essential aspect while offering a new issue. An underwriter’s
role in a primary marketplace includes purchasing unsold shares if it cannot
manage to sell the required number of shares to the public. A financial
institution may act as an underwriter, earning a commission on underwriting.
Investors rely on underwriters for determining whether undertaking the risk
would be worth its returns. It may so happen that an underwriter ends up
buying all the IPO issue, and subsequently selling it to investors.
• Distribution of New Issue
A new issue is also distributed in a primary marketing sphere. Such distribution
is initiated with a new prospectus issue. It invites the public at large to buy a
new issue and provides detailed information on the company, issue, and
involved underwriters.
 Importance of Primary Market:-
• Companies can raise capital at relatively low cost, and the securities so
issued in the primary market provide high liquidity as the same can be
sold in the secondary market almost immediately.

• The primary market is an important source for mobilisation of savings

in an economy. Funds are mobilised from commoners for investing in
other channels. It leads to monetary resources being put into
investment options.

• The primary market acts as a potential avenue for diversification to cut

down on risk. It enables an investor to allocate his/her investment
across different categories involving multiple financial instruments and
industries.

• It is not subject to any market fluctuations. The prices of stocks are

determined before an initial public offering, and investors know the
actual amount they will have to invest.

Functions of New issue market:-

1. Initial Public Offer (IPO)
An IPO is a crucial time for a company as it transitions from being
privately held to publicly traded. This process allows a company to
raise capital by offering for sale shares to the public for the first
time. The company generates hype through strategic
announcements and media coverage to create interest among
potential investors in anticipation of an upcoming IPO investment.
Following this, the company files a Draft Red Herring Prospectus
(DRHP) with the Securities and Exchange Board of India (SEBI). This
document is crucial as it provides comprehensive details about the
company's financial health, business model, future plans, and the
number of shares being offered.
Once SEBI reviews and approves the DRHP, the subscription period
commences, during which investors can submit bids to purchase shares at
a predetermined price for their IPO investment. This phase is critical as it
 determines the demand for the shares and the eventual price at which
they will be allotted. After the subscription period closes and shares are
allotted to investors, the final step is the listing of the company's shares
on a stock exchange.

2. Follow on Public Offer (FPO)

• An FPO is an additional issuance of shares by a company that is already
publicly listed, unlike an IPO where shares are issued for the first time. This is
the major point of difference between FPO and IPO. This process is used by
companies to raise extra capital for various strategic objectives such as debt
repayment, business expansion, or acquisitions. The FPO process begins
with the filing of a Draft Red Herring Prospectus (DRHP) with SEBI, similar to
the IPO process.
• Following SEBI’s approval of the DRHP, the company opens a subscription
period during which investors can place bids for the new shares. The
subscription process for an FPO is similar to that of an IPO, where the
demand for shares influences the final pricing and allocation. After the
subscription period concludes and shares are allocated, the newly issued
shares are listed on the stock exchange, increasing the company’s total
number of shares available for trading. Investing in an FPO can be attractive
as it provides an opportunity to invest in a company with an established track
record and potentially benefit from its future growth.

3. Offer for Sale (OFS)

The selling shareholders announce their intent to sell a certain
number of shares over a specified period, usually a single trading
day. The shares are then offered to investors at a price determined
by market demand. This method allows for a quick and efficient
transfer of shares without the need for extensive documentation
or prolonged subscription periods. The proceeds from the sale go
directly to the selling shareholders rather than the company itself.
For investors, an OFS can be an attractive opportunity to purchase
shares of established companies, often at a discount to the
prevailing market price. OFS is a mechanism used by existing
shareholders of a company, such as promoters or institutional
investors, to offer for sale their shares to the public through the
stock exchange. Unlike FPO and IPO, an OFS does not involve the
issuance of new shares or the raising of fresh capital by the
 company. Instead, it provides a platform for current shareholders
to liquidate their holdings, thereby increasing the public float of
the company’s shares.

Methods of floatation
In the primary market, companies utilize several methods to issue new
securities (like shares) to investors for the first time.

1. Fixed Price Method

A Fixed Price Issue is an IPO pricing method where the issuing company sets a
specific price per share before going public. Investors know the exact price,
providing clarity but lacking the flexibility to reflect market demand variations.
This method is simpler than the Book Building approach, offering
straightforward calculations for both companies and investors. Investors decide
based on the set price, which may benefit smaller companies or those new to
the market looking for predictable pricing.
While Fixed Price Issues offer transparency, they may miss potential market-
driven value adjustments. Demand remains uncertain until after the IPO closes,
as investors commit without influencing the share price based on interest or
market trends.

2. Book Building Process

Book Building is an IPO pricing method where the issuing company sets a price
range, allowing investors to bid within that range. The final share price is
determined based on demand, reflecting a market-driven valuation approach.
In this process, institutional and retail investors submit bids indicating the
number of shares they want and their desired price within the range. The highest
bids that meet demand are selected, and the final price (cut-off price) is
established accordingly.
Book Building offers flexibility, often resulting in a more accurate price reflecting
investor interest and market conditions. This method is popular among
companies seeking to optimize share value while gauging real-time demand
during the IPO process.
Pricing of Issues
In the primary market, the issue price of securities, like shares in an IPO, is the
price at which a company sells its newly issued securities to the public for the first
time. This price is determined by the issuing company, often with the help of an
underwriter, and reflects factors like market conditions, investor demand, and the
company's financial health.

Offer Documents
Offer Document is the primary document or the first step in the issue of securities
through an IPO. It has to be filed with SEBI at least 21 days prior to filing the
document with the Registrar of Companies or the stock exchanges. This
document will remain in the public domain on the website of SEBI to invite public
comments on the same.
Red Herring Prospectus – The Red Herring Prospectus (RHP) is the document that
is filed by the company with SEBI and is used in case of a book built issue. This
document contains all the final details of the IPO except the price or the number
of shares that are being offered in the IPO after incorporating all the changes as
suggested by SEBI.
Prospectus – A prospectus is to be filed by the company with the ROC in case of
a public issue and contains all the relevant information of the company including
the number of shares price at which they are being offered under the IPO. in case
of a fixed price IPO, this document is filed before the issue opens and it is to be
filed post closure of the issue in case of a book built IPO.
Abridged Prospectus – This is the comprehensive version of the prospectus or
the offer document that is to be provided along with the application form and
contains all the salient features of the offer and the company.

Appointment and Role of Merchant Bankers

Fundamentally, merchant bankers are financial institutions. The main activities
of merchant bankers are business loans as well as underwriting. They primarily
offer their services to large enterprises and individuals of high net worth. While
acting as a banker to an issue, a merchant banker has to disclose full details to
the Securities Exchange Board of India (SEBI) as it is the regulator for this
entity. They do not undertake the activities of depositories or retail lender
institutions. Merchant bankers are basically intermediaries. Merchant Bankers
are also known as the Book running lead managers (BRLM). They are registered
with SEBI and have merchant banking license. An IPO can have single or more
than one merchant bankers. In a Small and Medium Enterprise (SME) IPO, it is
mandatory to underwrite the IPO by merchant banker, however in case of
mainboard IPO, underwriting is not compulsory.

Role of Merchant Banker

In India, a merchant banker’s duties can be divided into the following main
categories:
• Underwriting: Merchant bankers are essential to the process of
underwriting new securities issues. In order to guarantee that there is
a market for the securities and provide investors confidence, this
involves a commitment to buy any unsold securities from the issuer.
• Issue Management: Merchant bankers are in charge of overseeing every
step of the issuance of new securities. This encompasses duties including
creating the prospectus, selecting the type of securities to be issued,
establishing the price, and managing the marketing and sale of the
securities to investors, among other things.
• Advisory Services: Merchant bankers offer helpful advice to companies
on a range of financial issues. This involves giving advice on company
restructuring, mergers and acquisitions, and strategic planning. They
assess possible buyers or sellers, determine the financial sustainability of
firms, and negotiate the terms of agreements.
• Portfolio Management: Merchant bankers also look after the portfolios
of high-net-worth clients and companies. In order to maintain a balanced
portfolio involves identifying suitable property, keeping an eye on
investment performance, and making the required modifications.

Underwriters
The appointment of an underwriter refers to the formal selection of a
financial institution or individual to assume the responsibility of
managing and facilitating the issuance of securities (such as stocks or
bonds) on behalf of an issuer, typically a company or government entity.
The underwriter acts as an intermediary between the issuer and the
investors, assisting with the pricing, marketing, and sale of the securities.
The underwriter may also assume the risk of buying the securities from
the issuer and reselling them to the public, a process known as
underwriting.
In many cases, the underwriter is appointed through a contract or
agreement, and the specific terms of the appointment, including the
underwriter's fees and responsibilities, are outlined in the underwriting
agreement.

Role of underwriters:- Their primary responsibility is to assess the

creditworthiness of loan applicants and determine the risks associated
with lending money. Loan underwriters analyse the applicant's credit
history, income, employment status, debt levels, and other relevant
financial information.

Role of Registrar:- The Registrar to an IPO plays a vital role in ensuring

the efficient processing and management of an Initial Public Offering
(IPO). Appointed by the company issuing securities, the Registrar
handles key administrative tasks, such as collecting applications from
investors, maintaining records, determining the basis of allotment, and
processing refunds. Additionally, they facilitate the transfer of shares to
investors' demat accounts and issue important documents like allotment
letters and refund orders. These responsibilities are crucial to ensure
transparency and fairness throughout the IPO process.
To serve as an IPO registrar, the entity must be registered with SEBI and
meet specific eligibility criteria, including having the necessary
infrastructure, experience, and compliance with regulatory
requirements. Importantly, a registrar cannot be associated with the
company issuing the securities to avoid conflicts of interest and maintain
impartiality.

Syndicate Members
When people or companies join together temporarily to manage a large
transaction that would be difficult, or impossible, to effect individually,
the resulting alliance is called a “syndicate.” Syndication makes it easy for
businesses to pool their resources and share risks. For example, when a
group of investment banks work together to bring a new issue of
securities to the market, they form a distributing syndicate. Other types
of syndicates are created for underwriting, banking, and insurance.
Role of a Broker:-
If you want to invest in shares, you cannot do it on a stock exchange.
That is the role of stockbrokers; they do the buying or selling of
shares on your behalf, in return for a fee or commission.

Simply, stockbrokers are market agents who link buyers and sellers on a
stock exchange. They are usually associated with a brokerage firm
facilitating stock market transactions.
Registered members of a stock exchange are also called stockbrokers.
The functions of stockbrokers are many, though the primary one relates
to buying and selling of stocks on behalf of their clients. In the simple
terms, one trades in the stock market with the broker’s help.

For performing a transaction, you need a trading and a Demat account,

which a broker will provide and also store your information as KYC (know
your customer).
ASBA (Applications Supported by Blocked Amount)
It is a method for applying to initial public offerings (IPOs) where the
application money remains in the investor's bank account and is only
blocked until the shares are allotted. This means the money is not directly
transferred to the issuer upfront, and the investor continues to earn
interest on the blocked amount. ASBA simplifies the IPO application
process and eliminates the need for refunds in case of unsuccessful
allotment. ASBA is a process developed by SEBI (Securities and Exchange
Board of India) where investors apply for IPOs through their bank
accounts, authorizing the bank to block the application amount. Instead
of paying the application money upfront, the investor's bank account is
blocked for the specified amount. This block is lifted if the investor doesn't
receive an allotment or if the IPO is withdrawn. From 2016, SEBI made it
mandatory for retail investors to apply through ASBA for IPOs. Investors
need a valid PAN number, a Demat account, and an account with a Self-
Certified Syndicate Bank (SCSB) offering ASBA facility.

Small and Medium Enterprises (SME) IPOs

SME is a term used to describe small and medium-scale industrial units
that have an investment threshold not exceeding ₹50 crore. Similar to
larger companies, SMEs may also want to raise funds for various purposes.
One of the numerous ways companies can raise funds is through an Initial
Public Offering (IPO).

Selecting an Underwriter
SMEs looking to raise funds through an IPO must first appoint an
underwriter. The underwriter assists the SME to draft its IPO-related
documents and helps in aspects such as determining the selling price of
the shares.

Creating the DRHP

The draft red herring prospectus (DRHP) is one of the most crucial
documents in the SME IPO process. The underwriter creates the DRHP
and submits it to the Securities and Exchange Board of India (SEBI) for
verification and approval.
 Advertising the IPO
Before an SME company goes public with an IPO, it must advertise the
issue to attract potential investors. Key details such as the opening and
closing dates of the issue, along with the price band, need to be
provided to the general public.

Allotting and Listing of Shares

The final step of an SME IPO includes the allotment of shares. Once the
subscription period of the issue closes, the company has to allot the
shares to the eligible investors. Following the allotment of shares, the
shares of the company are listed on the stock exchanges, and the
company becomes a publicly traded company.

Listing of Securities
Listing means the admission of a company’s securities to trading on a
stock exchange. Listing is not a compulsory act under the Companies Act
2013. It is only important when a Public Limited Company wants to issue
shares or debentures to public. When securities are listed on a stock
exchange, the company will have to comply with the exchange’s
requirements. The listing provides an exclusive privilege to securities on
stock exchange. Only listed shares are quoted on the stock exchange.
Stock exchange provides transparency in transactions of listed securities
and equality and competitive conditions. Listing is beneficial for the
company, the investor, and the public at large.

Terms and condition to list securities in Stock Exchange

• For initial public offers (IPOs) and follow-on public offerings (FPOS), the
minimum paid-up capital for the firm must be INR 10 crore and INR 3
crore, respectively.
• The offering must be at least INR 10 crore in size.
• A minimum market capitalization of INR 25 crore is required for the
company.
• The applicant, promoters, and/or group firms cannot break the listing
agreement without permission.

• The company must complete the allotment of securities in accordance with the
Listing Agreement within 30 days of closing the public subscription list.
 Secondary Market
A secondary market is a platform wherein the shares of companies are
traded among investors. It means that investors can freely buy and sell
shares without the intervention of the issuing company. In these
transactions among investors, the issuing company does not participate
in income generation, and share valuation is rather based on its
performance in the market. Income in this market is thus generated via
the sale of the shares from one investor to another.

There are 2 types of Secondary Market:-

1. Stock Exchange
2. Over the counter

Some of the entities that are functional in a secondary market include –

• Retail Investors
• Advisory service providers and brokers
• Financial Intermediaries including non-banking financial
companies ,insurance companies and mutual funds.

Different instruments traded in Secondary Market:-

The instruments traded in a secondary market consist of fixed income
instruments, variable income instruments, and hybrid instruments.

Fixed income instruments are primarily debt instruments ensuring a regular form
of payment such as interests, and the principal is repaid on maturity. Examples
of fixed income securities are – debentures, bonds, and preference shares.

Debentures are unsecured debt instruments, i.e., not secured by collateral.

Returns generated from debentures are thus dependent on the issuer’s credibility.

As for bonds, they are essentially a contract between two parties, whereby a
government or company issues these financial instruments. As investors buy these
bonds, it allows the issuing entity to secure a large amount of funds this way.
Investors are paid interests at fixed intervals, and the principal is repaid on
maturity.
Individuals owning preference shares in a company receive dividends before
payment to equity shareholders. If a company faces bankruptcy, preference
shareholders have the right to be paid before other shareholders.

Investment in variable income instruments generates an effective rate of return

to the investor, and various market factors determine the quantum of such return.
These securities expose investors to higher risks as well as higher rewards.
Examples of variable income instruments are – equity and derivatives.

Equity shares are instruments that allow a company to raise finance. Also,
investors holding equity shares have a claim over net profits of a company along
with its assets if it goes into liquidation.
As for derivatives, they are a contractual obligation between two different parties
involving pay-off for stipulated performance.

Two or more different financial instruments are combined to form hybrid

instruments. Convertible debentures serve as an example of hybrid instruments.
Convertible debentures are available as a loan or debt securities which may be
converted into equity shares after a predetermined period.

Functions of Secondary Market:

1. Providing Liquidity
The most important role of the secondary market is to provide liquidity. Liquidity
refers to how quickly and easily a security, such as company shares, can be
converted into cash. When you invest in stocks or bonds, the ability to sell them
quickly whenever you need to access funds is crucial.

2. Price Discovery
The secondary market plays a huge role in price discovery—this means
determining the fair price of a security based on supply and demand. When more
people want to buy a stock than sell it, its price goes up.
On the other hand, if more people are looking to sell than to buy, the price
decreases. The secondary market facilitates this ongoing process by allowing
constant trading, which adjusts prices in real time.
3. Providing Opportunities for Investors
The secondary market also gives investors the opportunity to buy and sell as they
wish. Whether you’re looking to hold long-term or make quick trades, the
secondary market enables flexibility.

4. Encouraging Investment
By offering liquidity and transparent pricing, the secondary market encourages
more people to invest. When you know you can sell your shares quickly at a fair
price, you’re more likely to put your money into the market.

5. Reducing Transaction Costs

Another key function of the secondary market is the reduction of transaction
costs. Centralised exchanges, like stock markets, streamline the buying and selling
process. They help investors avoid the high costs and inefficiencies that come with
private, one-on-one sales.

1. Selecting a Broker: The stock market involves trading through only

authorised brokers. These brokers can be individuals, companies, or even
partnerships. To begin the trading process, one should select a registered
broker.
2. Opening a Demat Account: Demat is short for dematerialised. The
Demat account is opened with the help of depositories, which include
brokers and banks. It is through this account that trading activities take
place. This is an electronic system. The depository helps keep the
investor or account holder informed about their transactions and the
status of their investments.
3. Placing an Order: Once a Demat account is opened, investors can place
orders in different ways, such as through brokers or themselves. The
order comprises the buying and selling of shares in the stock market.
4. Execution of the Order: Once an order is placed, it is executed by the
broker. Once executed, a contract note is issued, which informs the
investor of all transaction details or orders, such as date, time, and
amount.
 5. Settlement: This is the final step in the trading procedure. It involves the
actual transfer of securities between the buyer and the seller. This also
needs to be carried out by the broker. The two main kinds of settlement
are On-the-spot settlement, where funds are immediately transferred
and exchanged on the second working day of the transaction, and
Forward settlement, which implies that the transfer or exchange will be
carried out at some point in the future.

Types of trading:-

1) Day Trading
This form of trade involves purchasing and selling stocks in a single day. A single
day in stock market terms means 9:15 am to 3:30 pm on a weekday (barring
market holidays).

2) Scalping
It is also known as micro-trading. Scalping and day-trading are both subsets of
intraday trading. Scalping involves reaping small profits repeatedly ranging from a
dozen to a hundred profits in a single market day.
However, every transaction does not yield profits, and in some cases a trader’s
gross losses might exceed the gains. The holding period of securities, in this case,
is shorter compared to day-trading, i.e. individuals hold stocks spanning a
maximum of a few minutes.

3) Swing Trading
This style of stock market trading is used to capitalise on the short-term stock
trends and patterns. Swing trading is used to earn gains from stock within a few
days of purchasing it; ideally one to seven days.

4) Momentum Trading
In case of momentum trading, a trader exploits a stock’s momentum, i.e. a
substantial value movement of stock, either upwards or downwards. A trader tries
to capitalise on such momentum by identifying the stocks that are either breaking
out or will break out.
In case of upward momentum, the trader sells the stocks he/she is holding, thus
yielding higher than average returns. In case of downward movement, the trader
purchases a considerable volume of stocks to sell when its price increases.
5) Position Trading
Position traders hold securities for months aiming to capitalise on the long-term
potential of stocks rather than short-term price movements.

Screen-based trading and internet-based trading both facilitate electronic trading,

but differ in their access and infrastructure. Screen-based trading typically refers
to the system used by brokers to connect to an exchange's trading platform, while
internet-based trading allows individual investors to trade through the broker's
online platform via the internet.

Types of Stock Brokers

Stock brokers are intermediaries between investors and the stock market, offering
various services to facilitate the buying and selling of securities. Here are the main
types of stock brokers:
1. Full-Service Brokers
These brokers offer a comprehensive range of services beyond just executing
trades. They provide investment advice, portfolio management, research reports,
financial planning, and more.

2. Discount Brokers
Discount brokers offer basic services, primarily focused on executing trades
at lower commission rates. They do not provide investment advice or extensive
research.

3. Online Brokers
Online brokers provide a platform for investors to execute trades electronically via
the Internet. They offer a user-friendly interface with tools for research, analysis,
and trading.

4. Robo-Advisors
Robo-advisors are automated platforms that use algorithms to provide investment
advice and manage portfolios based on an investor’s goals and risk tolerance. They
offer low-cost, hands-off investing.
5. Specialized Brokers
These brokers focus on specific investment products or services, such as
commodity brokers, forex brokers, or futures brokers. They offer expertise in their
specialized fields.

Trading and Settlement Process in India

The trading and settlement process involves multiple steps:
1. Trade Execution: An investor places a buy/sell order through a broker.
2. Trade Confirmation: Once the order is matched, the trade is confirmed.
3. Clearing Process: Clearing corporations ensure that funds and securities
are available for settlement.
4. Settlement Process: On the settlement date, the actual exchange of
funds and securities takes place.
5. Final Record Update: The depository updates the investor’s demat
account with the shares purchased.

Demat Trading
The Demat full form stands for a Dematerialised Account. Demat is a form of an
online portfolio that holds a customer’s shares and other securities. It has negated
the necessity of holding and trading physical share certificates.

Documents Required for Opening a Demat Account

• PAN card, Aadhar card, Address Proof, Passport size photos, ID proof

Advantages of Demat Account

• Demat accounts eliminate the risk of damage, forgery, misplacement, or

theft of physical shares.

• The electronic system is also considerably simpler and can be

completed within hours. It has eliminated several time-consuming
operations, which has made the entire process streamlined and time-
saving.
 • Demat accounts come with remote access benefits, provided individuals
have a registered net banking facility with the concerned financial
institution.

Depositories and Custodians of Securities in Demat

Trading

A depository is an entity that holds securities such as stocks, bonds, mutual

funds, and government securities in a digital or dematerialized format on
behalf of investors. It simplifies the process of buying, selling, and holding
securities by eliminating the need for physical certificates.

Role of a Depository in Stock Market Transactions:

• Dematerialization: Converts physical securities into electronic form.

• Safe Custody: Ensures secure storage of securities.

• Settlement: Facilitates smooth transfer of securities during trade

settlement.

• Transparency: Provides clear records of ownership to investors.

A custodian is a bank or financial institution that holds financial securities

such as stocks, bonds, gold, and other valuables in their custody. Securities
and shares are held in the custody of custodians. It's possible that the
securities are held by some banks. A custodian is a company that provides
investors and customers with safekeeping services. The bank or financial
institution not only safeguards these assets, but also provides a historical view
of their value. The custodian also handles the purchase and sale of such
valuable assets on the investor's behalf.
SEBI Guidelines for Demat Account
Demat Account Opening Requirements

SEBI mandates specific KYC (know your customer) requirements for opening
demat accounts in India. You will have to provide your proof of identity (PAN
card), proof of address, and passport-sized photograph, along with a cancelled
cheque/bank statement.

Registration of your email ID and mobile number may be necessary along with
income proof in case you wish to trade in futures and options (F&O).

Demat Account Closing

SEBI does not have specific rules for closing demat accounts, although the
usual process is the following:

• Submit a written request to the DP asking for the closure of your demat
account

• Transfer your holdings to another demat account or sell them before

crediting the proceeds to your bank account

• Settle all outstanding charges/dues to the DP

• The DP will e-verify the application and close the account

❖ The latest SEBI circular on nomination for demat accounts (10th January,
2025) requires each investor to formally opt out or nominate a beneficiary.
❖ SEBI circulars mandate dematerialization of shares, and shareholders have
to hold shares in the electronic form (demat accounts) to enable transfers
and trading.
 SEBI Rules to Open a Demat Account for a Minor
Here are some of the key SEBI rules in this regard.
• The account should be opened and operated only by the legal guardian
or parent
• Minors cannot be joint holders in demat accounts and cannot engage in
intraday trading, high-risk activities, or derivatives
• Both the guardian and the minor should complete the mandatory KYC
procedures (and offer proof of relationship)
• When the minor turns 18, the account should be converted to a regular
demat account via a new form and fresh KYC formalities

Demat Account Opening Process

Step 1: Selecting Depository Participant (DP)
The primary step to opening a Demat account is shortlisting and choosing a
depository participant. DP is described as an agent of the depository. They are
the intermediaries between the investors and the depository, which could be an
authorized bank, financial institution or broker with whom you want to open a
Demat Account. Depending on your needs, requirements and trust, you need to
select a depository participant (DP) for your Demat account. The selection of DP
charges should ideally depend on the annual charges provided.

Step 2: Fill and Submit the Demat Account Opening Form

Once you have put your trust in a particular depository participant, you need to
fill up the Demat account opening form. You will have to provide all your details,
such as your full name, address, phone number, email, etc. Fill in the correct
details, submit the form to the respective entity and proceed to the next step.

Step 3: Fulfill all the KYC (Know Your Customer)

Requirements Along with the duly filled Demat account opening form, submit
the list of documents required, which will be discussed in the next part of this
blog. KYC is done so that the DP understands its traders and their financial
holdings to serve them better. Keep all the documents ready beforehand to
ensure the procedure is smooth and fast.

Step 4: In-Person Verification

Once the documents are verified, then the next step is In-Person Verification (or
IPV), wherein you will have to appear in person at DP’s office. This is a vital
exercise that you must complete to verify and validate your details.
Step 5. KYC Registration Agency (KRA)
After verifying the authenticity of prospective client, we upload the required
data at KRA and Central KYC agency and register the same with said agency

Step 6: Signing of the Agreement

This is the final step in which you will be required to sign an agreement with
your Depository Participant. This agreement specifies all of the responsibilities
and rights of the depository participant (DP) and the investor. Once that is done,
the DP will start, verify and expedite your Demat account application. You will
be given a unique Beneficial Owner Identification Number (BO ID) post your
application has been verified and approved. Then, you will be able to access your
Demat account using this identification number.

• SEBI (Issue of Capital and Disclosure Requirements-ICDR)

Regulation, 2018

The SEBI ICDR Regulations cover several important areas to ensure

companies raise money fairly and investors are well-informed. Here’s a
breakdown of the main requirements:
1. Minimum Promoter Contribution (MPC) Promoters (the people or
entities who start or control the company) must hold a certain
percentage of the company’s shares after the issue. This shows they’re
committed to the company’s success. Recent updates have made it easier
for more people, like promoter group members, to contribute to this
requirement.
2. Disclosure Requirements Companies must share detailed
information in their offer documents (like a prospectus), including:
• Financial statements (how much money the company makes and
spends).
• Risks that could affect the company’s performance.
• Details about the company’s management team.
• How the company plans to use the money it raises. This ensures
investors have all the facts to decide whether to invest.
3. Pricing and Allocation Rules The regulations explain how companies
set the price of their shares, often through a process called book-
building, where the price is determined based on investor demand. They
also set rules for how shares are divided among different types of
investors, like retail (individual) investors and institutional (big)
investors.
4. Lock-in Periods To prevent promoters or major shareholders from
selling their shares too quickly after an issue (which could hurt the share
price), the regulations require them to hold their shares for a specific
time, usually between 1 and 3 years, depending on the situation.

Stock exchange and Intermediaries

1. Stockbrokers
As per SEBI mandate, only stockbrokers can execute a trade on
exchanges. So, you’ll need to place your orders through a stockbroker. A
stockbroker is an intermediary responsible for mediating between the
bourse and the trader.
A corporate entity must fulfil the criteria laid down by the exchanges to
obtain a license to become a stockbroker.

2. Depository and Depository Participants

Companies allot share certificates to their investors to authenticate their
partnership with the company to the extent of shares bought by them.
Earlier, the companies issued physical share certificates. But they have
now been converted to digital format and are transferred directly to the
Demat account. This process is more convenient and transparent.
Converting physical share certificates to digital format is called
‘Dematerialisation’, often abbreviated as DEMAT.
To ensure accessible and secure storage of electronic share certificates,
Depository came into existence. They are governed and regulated by
SEBI.
3. Banks
You need to transfer funds to your stockbroker to buy shares. The
stockbroker credits funds to you when you sell shares. For the fund
transactions between you and your stockbroker, you need a bank
account. Hence, banks are one of the critical intermediaries that facilitate
fund transfer in capital markets.

4. Clearing Corporations
We know that banks establish a clearinghouse to settle mutual claims.
Likewise, in capital markets, Clearing Corporations ensure that the trade
is closed between two parties.
For instance, person A wants to buy 100 shares of XYZ company at Rs
100 per share. Meanwhile, B wants to sell 100 shares of XYZ company at
Rs 100 per share.
Clearing Corporation plays the following roles to complete the trade:
– Identifies buyers and sellers matching their ask and bid process
– Acts as a seller to A and buyer to B, guaranteeing the trade, ensuring no
default. It also maintains funds to assure transactions in the event of a
default
– It ensures funds get credited to the B and shares are credited to the
DEMAT account of A
Clearing Corporations prevent defaults by ensuring that buyers have the
necessary funds to pay for their trades and sellers have the assets they
intend to sell. They are the intermediaries responsible for the credibility
of the market ecosystem.
 SEBI’s Role in Investor Protection
As mentioned earlier, one of SEBI’s biggest responsibilities is to protect
investors. Many people put their life savings into shares and mutual
funds. SEBI, hence, works to make sure their money is safe. And it does
the same in the following ways:
• Before companies can sell shares to the public, they must follow

SEBI’s rules and share complete and honest information.

• SEBI bans unfair trading and keeps a check on people who try to use
insider information or manipulate prices unfairly. SEBI watches out
for malpractices like insider trading, price rigging and fraud. It can
take strict action if anyone breaks the law.
• Investors can file complaints through SEBI’s online platform.

The Securities Contracts (Regulation) Act, 1956 (SCRA)

It is a key piece of Indian legislation that regulates contracts in securities

and stock exchanges. It aims to prevent undesirable transactions in
securities and provides a framework for regulating the business of dealing
in them. The SCRA is crucial for defining "securities" and establishing rules
for trading and stock exchanges.

• Regulation of Securities Contracts:

The SCRA regulates various types of securities contracts, including spot

delivery contracts, futures contracts, and options contracts.

• Regulation of Stock Exchanges:

It provides for the recognition and regulation of stock exchanges in India,

ensuring they operate under prescribed norms.
 • Prevention of Undesirable Practices:

It aims to prevent practices like market manipulation, insider trading, and

other activities that could harm the integrity of the securities market.

• Investor Protection:

By regulating the market and ensuring fair practices, the SCRA contributes
to the protection of investors.

While the SCRA provides the legal framework, the Securities and Exchange
Board of India (SEBI) is the regulatory body responsible for enforcing the
SCRA and other securities laws. SEBI has the power to regulate and
approve by-laws of stock exchanges, inspect books of accounts, and take
other regulatory actions.

SEBI (The Listing Obligations and Disclosure

Requirements), Regulations 2015

It is a set of regulations laid out by SEBI to ensure that listed companies

adhere to comprehensive corporate governance norms and provide timely,
accurate, and transparent disclosures to shareholders and other
stakeholders. The regulations govern how listed entities communicate
essential information and meet compliance requirements in a fair and
efficient [Link] LODR mandate consolidates the rules governing a
company’s obligations from the time it becomes a listed entity to its day-to-
day operational conduct. It serves to:

• Ensure transparency in business operations.

• Promote better corporate governance.

• Protect the interests of investors by enforcing timely disclosures.

• Standardize disclosure requirements for listed entities.