In the modern world, stock markets have evolved as important drivers of national economy. Fair and clear-cut rules and regulations are enforced by governing bodies to ensure safety of all participants connected to the market. All stock exchanges have their own rules and regulations. Governing bodies take special care to protect interests of investors as this class is most widely dispersed, and generally more vulnerable to being taken for a ride. Additionally it is the investor class that infuses the capital into the market and hence bears higher risks than other participants. In India, SEBI is the principal regulatory authority for all secondary and primary market related activity. Other regulatory bodies and laws governing secondary market intermediaries are Securities and Contract Regulations Act 1956, Securities and Contracts Regulations Rules 1957; the Indian Stamp Act 1961 and the Bombay Stamp Act; the Central Excise Department; the Income tax; and the Reserve Bank of India. Various steps initiated by the Stock Exchanges for Investor protection are as follows : Protection Measures on BSE Trade Guarantee Fund BSE has formulated a scheme to guarantee settlement of transactions of members, which form part of the settlement system. For this, BSE has constituted a Trade Guarantee Fund with the following objectives :
Surveillance BSE has set up a separate Surveillance Department to keep a close watch on price movement of securities, detect market manipulations like price rigging, etc., monitor abnormal prices and volumes which are not consistent with normal trading pattern and monitor the member-brokers' position to ensure that defaults do not occur. It not only monitors the exposure of the members on a daily basis but also scrutinizes the prices and volumes of the securities on a daily basis. The large variation in the prices as well as the volumes of the securities is scrutinized and appropriate actions are taken. The securities, which reach new high or new low and companies, which have high turnover, are watched. Also the prices and volumes in the newly listed securities are monitored. In case certain abnormalities are noticed, then circuit filters are reduced to make it difficult for the price manipulators to increase or push down the prices of security within a short period of time. The Exchange imposes special margin in the securities where it is suspected that there is an attempt to ramp up the prices by creating artificial volumes. In cases where the abnormal movements continue despite the aforesaid measures, trading in the security is suspended. Detailed investigations are conducted in cases where price manipulation is suspected and disciplinary action is taken against the members concerned, if warranted. Where any security has been suspended for more than three days after obtaining necessary permission from SEBI, a detailed investigation report is prepared and sent to SEBI for further investigation/action, if any. 'Z' Group To protect investors from fraudulent companies listed on BSE has created a new group of securities known as ‘Z’ group category. The 'Z' group was introduced in the month of July 1999 and covers the list of companies, which fail to comply with listing requirements and also fail to resolve investor complaints. Investors' or Customers Protection Fund (IPF) In accordance with the guidelines issued by the Ministry of Finance, Government of India, BSE has set up an Investor Protection Fund (IPF) to meet the claims of investors against defaulter members. Further, as per the recent SEBI decision, auction proceeds in certain cases, where price manipulation / rigging was involved, have been impounded and transferred to the Investor Protection Fund. Redressal of Investor Grievances The grievances of investors against listed companies or members are redressed by the Exchange. The Exchange also assists in arbitration process both between members & investors and member’s inter-se. Investors’ grievances against companies BSE forwards the investors’ complaints against the companies to the concerned companies and a copy of the letter sent to the company is also forwarded to the complainant. He is advised to intimate the Exchange if his complaint is not resolved within 45 days. If a company fails to redress the complaint within 45 days, a reminder is sent. If a company still fails to respond to a large number of complaints pending against it, then a consolidated list of complaints is sent to it to resolve the same within 30 days. Inspite of the above efforts, if the complaints are not resolved, the company officials are asked to appear before the Investors’ Grievance Redressal Committee (IGRC) appointed by the Governing Board of the Exchange to resolve all the investors grievances. This Committee consists of five members including a retired judge of Mumbai High Court. The company officials are impressed by the committee members to resolve all the pending grievances immediately. Inspite of these efforts, if the complaints are not resolved then a show cause notice is issued by the Exchange and then the matter is placed before the Governing Board of the Exchange for necessary action against the company. Investors’ grievances against member-brokers of the Exchange BSE handles complaints of investors against members and vice-versa. It forwards the complaints of investors to the concerned members to settle within 7 days from the receipt of the letter. In case no reply is received from a member, a reminder is sent and the member is informed that if he does not reply/resolve the complaint immediately, a fine of Rs.500/- is levied on him. He is also directed to settle the matter expeditiously. In order to resolve the complaints expeditiously the matter is placed before the IGRC wherein both the investors and members present their case. After hearing both the parties, the Committee gives a decision, which is binding on both the parties. In case a member fails to implement the decision of the IGRC, then the matter is referred to the Executive Director for taking disciplinary action against the member which includes referring the matter to the Disciplinary Action Committee. Resolution of complaints through arbitration With a view to ensuring speedy and effective resolution of claims, differences and disputes between non-members and members and members inter-se, the Exchange has laid down a set of procedures for arbitration thereof. These procedures are duly embodied in the Rules, Bye-laws and Regulations of the Exchange, which have been duly approved by the Government of India/SEBI, under the Securities Contracts (Regulation) Act, 1956. Under the Rules, Bye-laws and Regulations of the Exchange, an in-house arbitration machinery has been provided to decide on:
However, complaints from non-members (clients/investors) against members and complaints of member’s inter-se are in the first case generally investigated by the BSE. For the purpose of investigation, documentary proof like contract notes, bills, statement of accounts and relevant documentary proof are called for from the parties. If required personal meetings of parties are arranged, to resolve complicated issues. As a last resort, where there are claims and counter-claims and the matter cannot be easily resolved by the intervention of the Exchange officials, the parties are advised to file an arbitration reference. The Exchange has amended the Bye-laws relating to arbitration between members with effect from 29th August, 1998 after getting the approval from SEBI. At present members of the Exchange as well as outsiders act as arbitrators in the disputes and claims filed by the non-members against members of the Exchange and vice-versa. The Exchange has since appointed a panel of 24 outside arbitrators consisting of retired Judges, Chartered Accountants and other persons from the financial field in addition to 16 members of the Exchange. This is pursuant to instructions from SEBI to reconstitute the Arbitration Committee comprising of 40% of the members of the Exchange and 60% outsiders, i.e., those who are not members of the Exchange. BSE has recently amended Bye-laws relating to Client v/s. Member arbitration in conjunction with Arbitration and Conciliation Act, 1996, passed by the Government of India. Under the new amended bye-laws there is a panel of three arbitrators, one appointed by the applicant, one by the respondent and the third by the Exchange. In case the value of the disputed claim is less than Rs 0.1 million, then only one arbitrator is appointed and if the value is greater than Rs 0.1 million, then there are three arbitrators for the case. Under the new amended bye-law after getting the arbitration award, the aggrieved party can appeal to the arbitration tribunal for any typographical/computational error, if any occurred in the award within fifteen days from the receipt of the award. In the amended Bye-law which provides for an appeal whereby the aggrieved party within fifteen days of the receipt of the award can file to the arbitration tribunal for re-hearing the whole case. On receipt of the appeal, the Exchange appoints an appeal bench consisting of five arbitrators who re-hear the case and then give the decision. The judgment of the appeal bench is by a majority decision and binding on both the parties. The final award of the bench is enforceable as if it were the decree of the Court. Bye-laws of the Exchange provide that all arbitration references be closed normally, within a period of four months. Protection measures on NSE Settlement Guarantee Fund In order to guarantee settlement, it has set up a Settlement Guarantee Fund contributed by the clearing members of the Corporation. As counter-party to settlement obligations, NSE guarantees financial settlement. As a result, though there have been a few defaults by member firms, the Clearing Corporation has stepped in to complete settlement and avoided market disruption. Short deliveries and un-rectified bad deliveries are automatically auctioned by NSCCL so that settlement is completed within a well-defined time frame. Investor Grievances Cell The Investor Grievances Cell (IGC) attends to various problems faced by investors in dealing with the two integral parts of the Capital Markets, Trading Members and Companies whose securities are traded on the Exchange. The investors can report their complaints/ grievances to the IGC through e-mails or through Complaint forms. All valid complaints are assigned a unique complaint no. and are entered into a database for easy follow up and necessary action. Most complaints are resolved within a period of 45 days. On exhausting all means, if the matter remains unresolved, it is referred to Arbitration. Arbitration Arbitration is an alternative dispute resolution mechanism provided by the NSE for resolving disputes between the trading members and between trading members & constituents (i.e. clients of trading members), in respect of trades done on the Exchange. This process of resolving a dispute is comparatively faster than other means of redressal. The facility of arbitration on the Exchange can be availed by:
The appointment of an Arbitrator is linked to the claim amount. If the claim amount is Rs 2.5 millions or less, then a Sole Arbitrator is appointed and if the claim amount is more than Rs 2.5 millions, then a panel of three arbitrators is appointed. The comprehensive approach to risk management taken by BSE and NSE encompassing the quality of clearing/trading members, tight monitoring mechanism, strict margining, efficient settlement systems have made the Secondary market in India comparable to any of the markets worldwide. Links http://investor.sebi.gov.in/ http://www.nseindia.com/content/assist/asst_invcentre.htm http://www.bseindia.com/invdesk/invrights.asp |
Sunday, May 24, 2009
Investor Protection Measures
Settlement
Once you have bought or sold shares, the transaction is complete only when you have got the shares you purchased, or received money for the shares you sold. This is called settlement in stock market parlance. The stock exchanges have a complex mechanism in place to ensure that every trade is properly matched, and shares are received or delivered properly. In case of a shortfall of securities, an auction is resorted to close out the difference.
The mechanism through which all parties to a transaction get their receivables i.e. either funds or shares is known as ‘clearing and settlement’ or simply ‘settlement’.
Settlement agents
On each of the exchanges, thousands of orders get matched with each other during the course of a trading cycle. Even though for each trade there is a buyer broker and a seller broker, they never interact with each other for the settlement of that trade. Their interaction is only with the settlement agency of their exchange.
When an investor enters into a transaction with a broker, either the shares or funds have to be delivered to the broker. In turn, the broker delivers these to the settlement agent on ‘pay-in day’ (explained in the next section). Having made sure that it has received shares and funds from all brokers, it processes the deliveries and earmarks the shares for delivery to the buyer broker. So on the pay-out day (explained in the next section) it is able to deliver shares to the respective buyer broker and funds to the respective seller broker.
For trades on BSE, the settlement agent is called as ‘Clearing House (CH)’ while on NSE it is ‘National Securities Clearing Corporation Ltd. (NSCCL)’
Clearing House – Settlement Agent of the BSE
The clearing and settlement operations of the BSE is managed by a company called BOI Share Holding, which is a subsidiary of Bank of India and BSE and is known as ClearingHouse. All settlements for securities are through the ClearingHouse on a delivery versus payment (DVP) basis.
National Securities Clearing Corporation – Settlement Agent of NSE
The clearing and settlement operations of the NSE are managed by its wholly owned subsidiary, the National Securities Clearing Corporation Limited, also known as Clearing Corporation.
Common settlement processes on both exchanges
Settlement Cycle on the BSE
The settlement cycle on the BSE is Trade plus two days, or T+2, as per a Sebi directive implementing this new cycle from April 1, 2003. Under rolling settlement, trades done on one day are settled after a certain number of days. So, T+2 will mean that the final settlement of transactions done on the Trade day, will be settled by exchange of money and securities on the second business day (excluding Saturday, Sundays, Bank and Exchange Trading Holidays).
Pay-in and Pay-out for 'A', 'B1', 'B2', ‘T’, ‘S’, ‘TS’, 'C', "F", "G" & 'Z' group of securities
Settlement is done on a T+2 basis. The pay-in/pay-out process will be settled on the T+2 day.
Summary of the Settlement Cycle
Source : www.bseindia.com
NSE Settlement Cycle
The NSE too follows a rolling settlement cycle of T+2.
The stock exchange sends to NSCCL the details of trades at the end of the trading day. The clearing corporation determines the total obligations of each member and transfers the data to clearing members (CM). All the trades done during a particular trading session are clubbed together and settled. NSCCL then determines the net obligations of members in terms of deliveries of securities and funds, and the settlement is completed when the funds and securities are paid out.
On the securities pay-in day, members bring in securities to NSCCL whereas on the pay out day, securities are delivered to members. If there is a shortfall in securities, then an auction is conducted to meet it.
This table makes the process clearer :
Source : www.nseindia.com
The mechanism through which all parties to a transaction get their receivables i.e. either funds or shares is known as ‘clearing and settlement’ or simply ‘settlement’.
Settlement agents
On each of the exchanges, thousands of orders get matched with each other during the course of a trading cycle. Even though for each trade there is a buyer broker and a seller broker, they never interact with each other for the settlement of that trade. Their interaction is only with the settlement agency of their exchange.
When an investor enters into a transaction with a broker, either the shares or funds have to be delivered to the broker. In turn, the broker delivers these to the settlement agent on ‘pay-in day’ (explained in the next section). Having made sure that it has received shares and funds from all brokers, it processes the deliveries and earmarks the shares for delivery to the buyer broker. So on the pay-out day (explained in the next section) it is able to deliver shares to the respective buyer broker and funds to the respective seller broker.
For trades on BSE, the settlement agent is called as ‘Clearing House (CH)’ while on NSE it is ‘National Securities Clearing Corporation Ltd. (NSCCL)’
Clearing House – Settlement Agent of the BSE
The clearing and settlement operations of the BSE is managed by a company called BOI Share Holding, which is a subsidiary of Bank of India and BSE and is known as ClearingHouse. All settlements for securities are through the ClearingHouse on a delivery versus payment (DVP) basis.
National Securities Clearing Corporation – Settlement Agent of NSE
The clearing and settlement operations of the NSE are managed by its wholly owned subsidiary, the National Securities Clearing Corporation Limited, also known as Clearing Corporation.
Common settlement processes on both exchanges
| The broker directly carries out settlements of physical securities with the ClearingHouse/ Clearing Corporation. |
| CH/NSCCL instructs designated clearing banks to do funds settlement. |
| The CH/NSCCL interfaces with the depository on one hand and the clearing banks on the other to provide DVP settlement for depository enabled trades. |
The settlement cycle on the BSE is Trade plus two days, or T+2, as per a Sebi directive implementing this new cycle from April 1, 2003. Under rolling settlement, trades done on one day are settled after a certain number of days. So, T+2 will mean that the final settlement of transactions done on the Trade day, will be settled by exchange of money and securities on the second business day (excluding Saturday, Sundays, Bank and Exchange Trading Holidays).
Pay-in and Pay-out for 'A', 'B1', 'B2', ‘T’, ‘S’, ‘TS’, 'C', "F", "G" & 'Z' group of securities
Settlement is done on a T+2 basis. The pay-in/pay-out process will be settled on the T+2 day.
Summary of the Settlement Cycle
| Day | Activity | |||
| T |
| |||
| T+1 |
| |||
| T+2 |
| |||
| T+3 |
| |||
| T+4 |
|
Source : www.bseindia.com
NSE Settlement Cycle
The NSE too follows a rolling settlement cycle of T+2.
The stock exchange sends to NSCCL the details of trades at the end of the trading day. The clearing corporation determines the total obligations of each member and transfers the data to clearing members (CM). All the trades done during a particular trading session are clubbed together and settled. NSCCL then determines the net obligations of members in terms of deliveries of securities and funds, and the settlement is completed when the funds and securities are paid out.
On the securities pay-in day, members bring in securities to NSCCL whereas on the pay out day, securities are delivered to members. If there is a shortfall in securities, then an auction is conducted to meet it.
This table makes the process clearer :
| Activity | Day | |
| Trading | Rolling Settlement Trading | T |
| Clearing | Custodial Confirmation | T+1 working days |
| Delivery Generation | T+1 working day | |
| Settlement | Securities and Funds pay in | T+2 working day |
| Securities and Funds pay out | T+2 working day | |
| Valuation Debit | T+2 working day | |
| Post Settlement | Auction | T+3 working day |
| Bad Delivery Reporting | T+4 working day | |
| Auction settlement | T+5 working day | |
| Rectified bad delivery pay-in and pay-out | T+6 working day | |
| Re-bad delivery reporting and pickup | T+8 working day | |
| Close out of re-bad delivery and funds pay-in & pay-out | T+9 working days |
Source : www.nseindia.com
Types Of Market Transactions
You will find it easier to transact in the stock market once you attain a basic understanding of market mechanics. Before a share is purchased or sold, the investor must instruct his broker about the order. This means clearly specifying how the order is to be placed. Sending proper instructions to your broker – either by phone or online- is the first step to avoid hassles later on.
Basically, two types of share transaction exist -buy orders and sell orders. Technically sell orders can be further classified as either selling long or selling short.
Buy Orders
Buy orders are placed when you anticipates a rise in prices. The investor enters a buy order when he finds the price appropriate, after deciding the number of shares he wants to purchase and ensuring that he has the requisite funds to take delivery, if needed.
Sell Orders
When you wish to sell shares of a company you own at present, either because the investment target has been met or you expect a decline in price, you place a sell order with your broker.
Various types of orders that you can put through to exchanges are as follows:
Price Limit Orders
An investor can have his order executed either at the best prevailing price on the exchange or at a pre-determined price.
Market Order
A market order is one you place to sell shares at the prevailing price, when your order is entered in the system. They are executed as fast as possible at the best prevailing price on the exchange. It means that your order quantity will be executed the moment it reaches the exchange provided the required quantity is available. This order type is accepted by both the exchanges i.e. BSE and NSE.
The obvious advantage of a market order is the speed with which it is executed. The disadvantage is that the investor does not know the exact execution price until after the execution. This advantage is potentially most troublesome when dealing in either very inactive or very volatile securities.
Limit orders
Limit type orders refer to a buy or sell order with a price limit. Limit orders overcome the disadvantage of the market order, namely not knowing in advance the price at which the transaction will take place. It means that if the order gets executed, them it will be within the limit specified or at a better rate than that. This order type is accepted by both the exchanges i.e. BSE and NSE.
When using a limit order, the investor specifies in advance the limit price at which he wants the transaction to be carried out. It is always understood that the price limitation includes an "or better" instruction. In the case of a limit order to buy, the investor specifies the maximum price he will pay for the share; the order can be carried out only at the limit price or lower. In the case of a limit order to sell, the investor specifies the minimum price he will accept for the share; the order can be carried out only at the limit price or higher.
Use of Market and Limit order
When do you use a limit order? To safeguard against extreme volatility, you can put a limit on the price at which you want your order to be executed. Generally, limit orders are placed "away from the market." This means that the limit price is somewhat removed from the prevailing price (generally, above the prevailing price in the case of a limit order to sell, and below the prevailing price in the case of a limit order to buy).
Obviously, the investor believes his limit price will be executed during the trading day. That, however, is also the chief disadvantage of a limit order. It may never be executed at all. If the limit price is set very close to the prevailing price, there is little advantage over the market order. Moreover, if the limit is considerably removed from the market, the price may never reach the limit – even because of a fractional difference. Also because limit orders are filled on a first come first basis, it is possible that so many of them are in ahead of the investor’s limit at a given price that his order will never be executed. Thus, selecting a proper limit price is a delicate exercise.
On the other hand a market order is filled at the best possible price as soon as an investor places the order and it will not be even possible to cancel the order. However, a limit order may be cancelled or modified at any time prior to execution.
Various types of specific orders
So far orders have been classified by type of transaction (buy or sell) and by price (market or limit). Now differences stemming from the time limit placed on the order will be examined. Orders can be for either a day or until canceled.
Day Order or End of Day Order
A day order is one that remains active only for the normal trading time on that day. Unless otherwise requested by the investor, all orders are treated as day orders only. Market orders are almost day orders because they do not specify a particular price. One key rationale for the day order is that market conditions might change overnight, and thus a seemingly good investment decision one day might seem considerably less desirable the following day.
Special Types of Orders
Stop Loss Order
A stop loss order allows investor to place an order which gets activated only when the last traded price of the share is reached or crosses a predefined threshold price also called as trigger price. It means that if investor feels that any particular share will be worth buy or sell only after it crosses some threshold rate then this type of order gets activated. For example, a buy order at Rs 100 with a stop loss of Rs 90, will mean that if the share falls to Rs 90, the shares will be sold, limiting the loss to Rs 10.
Several possible dangers are inherent when using this type of order. First, if the stop is placed too close to the market, the investor might have his position closed out because of a minor price fluctuation, even though his idea will prove correct in the long run. On the order hand, if the stop is too far away from the market, the stop order serves no purpose.
Further classification of this type of orders can be defined depending upon the price limit of orders, i.e. the price on which the order should execute, as explained under:
Stop Loss Market Order
A stop loss market order is a special type of limit order. A stop loss market order to sell is treated as a market order when the stop price or a price below is "touched" (reached); a stop market order to buy is treated as a market order when the stop price or a price above it is reached. Thus, stop market order to sell is set at a price below the current market price, and a stop order to buy is set at a price above the current market price.
The possible inherent danger associated with this type of order is that because they become market orders after the proper price level has been reached, the actual transaction could take place some distance away from the price the investor had in mind when he placed the order. The reason may be prior queuing up of other orders or order quantity not being available.
Stop Loss Limit Order
The stop loss limit order overcomes the uncertainty associated with the stop loss market order, of not knowing what price the order will be executed at. The stop limit order gives the investor the advantage of specifying the limit price: the maximum price on which the buy order should filled or minimum price on which the sell order should filled. Therefore, a stop limit order to buy is activated as soon as the stop price or higher is reached, and then an attempt is made to buy at the limit price or lower. Conversely, a stop limit order to sell is activated as soon as the stop price or lower is reached, and then an attempt is made to sell at the limit price or higher.
The danger is that, in a volatile market, the order may not get executed because the difference between the execution limit and the stop price may be too low. However, if things work out as planned, the stop limit order to sell will be very effective.
Disclosed Quantity (DQ) order
The system provides a facility for entering orders with quantity conditions: DQ order allows you to disclose only a part of the order quantity to the market.
Price Bands
Also known as circuit filters or circuit breakers, price bands set the upper and lower limit within which a stock can fluctuate on any given day. A price band for the day is a function of previous trading day’s closing.
Currently the both BSE and NSE has fixed price bands for different securities within which they can move within a day.
Price bands are supposed to prevent extreme price movements, reducing the scope of price manipulation. Price bands do slow things down and make it that much harder for operators wanting to quickly manipulate prices in huge leaps. When there is general euphoria or panic in the market that seems fundamentally unwarranted, price bands give wary investors the benefit of a cooling period.
Operators with access to large funds, shares and time at their disposal, however can manipulate the price bands to their advantage by blocking exit/entry of other investors from a particular counter by placing huge orders. For example when a stock touches the lower circuit in a sharp downtrend, ordinary buyers would wait for the next trading session believing that the stock will be available at a still lower price. As a result, investors wanting to sell the stock won’t find buyers at the lower circuit price but would have to offload at a much lower price due to the volume-led manipulation executed by operator. The operator would thus be able to batter the stock down by a large gap created by his own sell orders.
Much larger volume of the battered stock would then be accumulated by the same operator at a much lower price as panic-stricken ordinary investors would happily exit the stock.
Basically, two types of share transaction exist -buy orders and sell orders. Technically sell orders can be further classified as either selling long or selling short.
Buy Orders
Buy orders are placed when you anticipates a rise in prices. The investor enters a buy order when he finds the price appropriate, after deciding the number of shares he wants to purchase and ensuring that he has the requisite funds to take delivery, if needed.
Sell Orders
When you wish to sell shares of a company you own at present, either because the investment target has been met or you expect a decline in price, you place a sell order with your broker.
Various types of orders that you can put through to exchanges are as follows:
Price Limit Orders
An investor can have his order executed either at the best prevailing price on the exchange or at a pre-determined price.
Market Order
A market order is one you place to sell shares at the prevailing price, when your order is entered in the system. They are executed as fast as possible at the best prevailing price on the exchange. It means that your order quantity will be executed the moment it reaches the exchange provided the required quantity is available. This order type is accepted by both the exchanges i.e. BSE and NSE.
The obvious advantage of a market order is the speed with which it is executed. The disadvantage is that the investor does not know the exact execution price until after the execution. This advantage is potentially most troublesome when dealing in either very inactive or very volatile securities.
Limit orders
Limit type orders refer to a buy or sell order with a price limit. Limit orders overcome the disadvantage of the market order, namely not knowing in advance the price at which the transaction will take place. It means that if the order gets executed, them it will be within the limit specified or at a better rate than that. This order type is accepted by both the exchanges i.e. BSE and NSE.
When using a limit order, the investor specifies in advance the limit price at which he wants the transaction to be carried out. It is always understood that the price limitation includes an "or better" instruction. In the case of a limit order to buy, the investor specifies the maximum price he will pay for the share; the order can be carried out only at the limit price or lower. In the case of a limit order to sell, the investor specifies the minimum price he will accept for the share; the order can be carried out only at the limit price or higher.
Use of Market and Limit order
When do you use a limit order? To safeguard against extreme volatility, you can put a limit on the price at which you want your order to be executed. Generally, limit orders are placed "away from the market." This means that the limit price is somewhat removed from the prevailing price (generally, above the prevailing price in the case of a limit order to sell, and below the prevailing price in the case of a limit order to buy).
Obviously, the investor believes his limit price will be executed during the trading day. That, however, is also the chief disadvantage of a limit order. It may never be executed at all. If the limit price is set very close to the prevailing price, there is little advantage over the market order. Moreover, if the limit is considerably removed from the market, the price may never reach the limit – even because of a fractional difference. Also because limit orders are filled on a first come first basis, it is possible that so many of them are in ahead of the investor’s limit at a given price that his order will never be executed. Thus, selecting a proper limit price is a delicate exercise.
On the other hand a market order is filled at the best possible price as soon as an investor places the order and it will not be even possible to cancel the order. However, a limit order may be cancelled or modified at any time prior to execution.
Various types of specific orders
So far orders have been classified by type of transaction (buy or sell) and by price (market or limit). Now differences stemming from the time limit placed on the order will be examined. Orders can be for either a day or until canceled.
Day Order or End of Day Order
A day order is one that remains active only for the normal trading time on that day. Unless otherwise requested by the investor, all orders are treated as day orders only. Market orders are almost day orders because they do not specify a particular price. One key rationale for the day order is that market conditions might change overnight, and thus a seemingly good investment decision one day might seem considerably less desirable the following day.
Special Types of Orders
Stop Loss Order
A stop loss order allows investor to place an order which gets activated only when the last traded price of the share is reached or crosses a predefined threshold price also called as trigger price. It means that if investor feels that any particular share will be worth buy or sell only after it crosses some threshold rate then this type of order gets activated. For example, a buy order at Rs 100 with a stop loss of Rs 90, will mean that if the share falls to Rs 90, the shares will be sold, limiting the loss to Rs 10.
Several possible dangers are inherent when using this type of order. First, if the stop is placed too close to the market, the investor might have his position closed out because of a minor price fluctuation, even though his idea will prove correct in the long run. On the order hand, if the stop is too far away from the market, the stop order serves no purpose.
Further classification of this type of orders can be defined depending upon the price limit of orders, i.e. the price on which the order should execute, as explained under:
Stop Loss Market Order
A stop loss market order is a special type of limit order. A stop loss market order to sell is treated as a market order when the stop price or a price below is "touched" (reached); a stop market order to buy is treated as a market order when the stop price or a price above it is reached. Thus, stop market order to sell is set at a price below the current market price, and a stop order to buy is set at a price above the current market price.
The possible inherent danger associated with this type of order is that because they become market orders after the proper price level has been reached, the actual transaction could take place some distance away from the price the investor had in mind when he placed the order. The reason may be prior queuing up of other orders or order quantity not being available.
Stop Loss Limit Order
The stop loss limit order overcomes the uncertainty associated with the stop loss market order, of not knowing what price the order will be executed at. The stop limit order gives the investor the advantage of specifying the limit price: the maximum price on which the buy order should filled or minimum price on which the sell order should filled. Therefore, a stop limit order to buy is activated as soon as the stop price or higher is reached, and then an attempt is made to buy at the limit price or lower. Conversely, a stop limit order to sell is activated as soon as the stop price or lower is reached, and then an attempt is made to sell at the limit price or higher.
The danger is that, in a volatile market, the order may not get executed because the difference between the execution limit and the stop price may be too low. However, if things work out as planned, the stop limit order to sell will be very effective.
Disclosed Quantity (DQ) order
The system provides a facility for entering orders with quantity conditions: DQ order allows you to disclose only a part of the order quantity to the market.
Price Bands
Also known as circuit filters or circuit breakers, price bands set the upper and lower limit within which a stock can fluctuate on any given day. A price band for the day is a function of previous trading day’s closing.
Currently the both BSE and NSE has fixed price bands for different securities within which they can move within a day.
Price bands are supposed to prevent extreme price movements, reducing the scope of price manipulation. Price bands do slow things down and make it that much harder for operators wanting to quickly manipulate prices in huge leaps. When there is general euphoria or panic in the market that seems fundamentally unwarranted, price bands give wary investors the benefit of a cooling period.
Operators with access to large funds, shares and time at their disposal, however can manipulate the price bands to their advantage by blocking exit/entry of other investors from a particular counter by placing huge orders. For example when a stock touches the lower circuit in a sharp downtrend, ordinary buyers would wait for the next trading session believing that the stock will be available at a still lower price. As a result, investors wanting to sell the stock won’t find buyers at the lower circuit price but would have to offload at a much lower price due to the volume-led manipulation executed by operator. The operator would thus be able to batter the stock down by a large gap created by his own sell orders.
Much larger volume of the battered stock would then be accumulated by the same operator at a much lower price as panic-stricken ordinary investors would happily exit the stock.
Stock Exchanges in India – BSE and NSE
There are two national stock exchanges in the country, the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). Most large brokers hold membership cards in both exchanges, offering investors a choice of placing their trades on either bourse.
Bombay Stock Exchange (BSE)
The BSE is the oldest stock exchange in the country, established in 1875. It was structured as a membership based firm, an Association of Persons. It is now a demutualised and corporatised entity, falling in line with Sebi's guidelines on demutualization of stock exchanges. The purpose is to separate ownership and management to prevent any conflicts of interest.
The BSE is managed by a Board of Directors, comprising professionals, trading member representatives and has a managing director too. The Board formulates larger policy issues and exercises overall control. The managing director takes care of daily operations. The exchange is present in 417 cities in India.
Source : www.bseindia.com, as of Feb’07
Business Transacted on the BSE
There were 7639 scrips that are listed on the BSE. Not all are actively traded, with the number of scrips traded in Feb’07 at 2602. The average cash segment daily turnover on the BSE was Rs 4,675 crore in Feb’07 and the market capitalization of scrips listed on the BSE was Rs 34.9 lakh crore. The derivatives segment turnover in the month of Feb’07 was Rs 13,189 crore in Feb’07.
These statistics keep changing, to get an update on the latest statistics, go to www.bseindia.com. This link in particular may give you current information : http://www.bseindia.com/about/st_key/volumeofturnoverbusiness_tran.asp.
BSE Indices
The BSE maintains several stock indices that are popular among investors. The following are some of the closely watched indices.
Apart from these, there are a host of other indices which focus on certain sections of stocks like small cap and mid-cap stocks. Then there are various other indices that are focused on sectors. These indices are updated on a real time basis in market hours.
The most popular index is the BSE Sensitive Index, the Sensex.
BSE Sensitive Index (Sensex)
National Stock Exchange of India Limited (NSE)
The NSE was set up in 1992 by leading financial institutions (IDBI, LIC, UTI, ICICI, SBI and others) and was the first one to offer screen based trading all over India. Though the impetus for its establishment came from policy makers in the country, it has been set up as a public limited company.
NSE is different from most other stock exchanges in India where membership on an exchange also meant ownership of the exchange. At the NSE, the ownership and management of the exchange are completely separate.
Governing body
Membership
There are 789 members (as of Feb 28 ’07) who can trade on both the capital market and derivatives segments. There are 150 members who can trade only on the capital market segment. There are 47 members who can trade on the capital market, wholesale debt market (WDM) and derivatives’ segments. There are 9 members who can trade on WDM and capital market segments, and 7 who can trade only on WDM. In all, there are 1002 members.
Number of listed companies
Classification of Listed Securities
On NSE, securities for account period settlement are classified as ‘EQ’ segment or ‘Normal’ segment. For book entry i.e. rolling settlement, the securities are traded in two separate segments known as ‘AE Segment’ and ‘BE Segment’. In case of AE segment, dematerialised securities are traded only in market lots, whereas in BE segment these can be traded in multiples of one share.
NSE Indices
The popular indices of NSE are :
Method of Computation of Indices
Method of Computation of Indices
The CNX Indices are computed using a market capitalization weighted method wherein the level of the Index reflects the total market value of all the stocks in the index relative to a particular base period. The method also takes into account constituent changes in the index and importantly corporate actions such as stock splits, rights, etc without affecting the index value.
Index Maintenance
The Index Maintenance Sub-committee of NSE ensures that the guidelines for index maintenance are adhered to, for example: -
Adjustments for corporate actions are carried out in a timely manner to ensure that the value of the index is not affected by the corporate action, and remains comparable over a period of time. Each index has a replacement pool comprising companies that meet all criteria for candidacy to that index. All replacements of companies in the index take place from this pool. The replacement pool is monitored continuously and at all times includes only those companies that meet the selection criteria.
S&P CNX Nifty
It is the most popular index, which represents about 58% of the total market capitalization of NSE.
The salient features of the S&P CNX Nifty are :
Impact Cost Definition – The cost of executing a transaction in a security in proportion to the weight of its market capitalization against the index market capitalization at any point of time.
Impact Cost Calculation - This is the percentage mark up suffered while buying or selling the desired quantity of a security compared to its ideal price
(best buy + best sell) / 2, e.g.
Bids and Offer at a particular time
To Buy 1500 Shares IDEAL PRICE = (99 + 98)/2 = 98.5
ACTUAL BUY PRICE = (1000 X 99 + 500 X 100)/1500 = 99.33
(FOR 1500 SHARES) IMPACT COST = (99.33 - 98.5)/98.5 X 100 = 0.84%
Base Date and Value
The base period selected for S&P CNX Nifty index is the close of prices on November 3, 1995, which marks the completion of one year of operations of NSE’s Capital Market Segment. The base value of the index has been set at 1,000 and a base capital of Rs. 2.06 trillion.
Bombay Stock Exchange (BSE)
The BSE is the oldest stock exchange in the country, established in 1875. It was structured as a membership based firm, an Association of Persons. It is now a demutualised and corporatised entity, falling in line with Sebi's guidelines on demutualization of stock exchanges. The purpose is to separate ownership and management to prevent any conflicts of interest.
The BSE is managed by a Board of Directors, comprising professionals, trading member representatives and has a managing director too. The Board formulates larger policy issues and exercises overall control. The managing director takes care of daily operations. The exchange is present in 417 cities in India.
| Types of Members | Numbers |
| Individuals | 180 |
| Indian companies | 719 |
| Foreign Institutional Investors | 22 |
Source : www.bseindia.com, as of Feb’07
Business Transacted on the BSE
There were 7639 scrips that are listed on the BSE. Not all are actively traded, with the number of scrips traded in Feb’07 at 2602. The average cash segment daily turnover on the BSE was Rs 4,675 crore in Feb’07 and the market capitalization of scrips listed on the BSE was Rs 34.9 lakh crore. The derivatives segment turnover in the month of Feb’07 was Rs 13,189 crore in Feb’07.
These statistics keep changing, to get an update on the latest statistics, go to www.bseindia.com. This link in particular may give you current information : http://www.bseindia.com/about/st_key/volumeofturnoverbusiness_tran.asp.
BSE Indices
The BSE maintains several stock indices that are popular among investors. The following are some of the closely watched indices.
| BSE Sensitive Index (BSE-30) |
| BSE National Index (BSE-100) or BSE 100 |
| BSE-200 and the Dollex |
| BSE-500 |
The most popular index is the BSE Sensitive Index, the Sensex.
BSE Sensitive Index (Sensex)
| Coverage : Originally, it comprised 30 companies from both the "specified" i.e., ‘A’ group and the "non-specified" i.e., ‘B1 & B2’ groups. However, at present all the securities included in the Sensitive Index are specified group shares. These shares are selected on the basis of their liquidity, depth, and floating-stock-adjusted depth, as well as on the basis of industry representation. |
| Method of compilation : The compilation of the index values is based on the 'weighted aggregates' method. In this method, the number of equity shares outstanding for that stock weights the price of a component share in the index. This way, each security will influence the index in proportion to its relative importance in the market. When the price of a share is multiplied by the number of its equity shares outstanding, the result is the current market value for that particular security. The index on a day is calculated as the percentage of the aggregate market value of the equity shares of all the companies in the sample on that day to the average market value of the same companies during the base period for that index. This method of compilation has the advantage that it has the necessary flexibility to adjust for price changes caused by various corporate actions. The methodology is the same as that employed in many popular indices such as the Standard & Poor’s 500, Dow Jones Index, Hang Seng Index, NYSE Composite Index and FT-SE 100 Index. |
| It is a wealth-measuring index where the prices are weighted by market capitalization. Initially, the index was computed on full market capitalization but since April 2003, it has moved to a free float market capitalization method. In such an index the base period values are adjusted for subsequent rights and new issue of equity. This adjustment prevents a distorted picture and gives an idea of wealth created for investors over a period. |
| Base year : The financial year 1978-79 was chosen as the base year. Considerations for the choice were the price stability during that year and proximity to the period of introduction of the index. One of the important aspects of maintaining continuity with the base year is to update the base year average. The base year value adjustment ensures that the rights issue and new capital of the index securities do not destroy the value of the index. |
| On-line computation of the index : During market hours, the BSE’s computers automatically use the prices of the index securities at which trades are executed to calculate the Sensex in a process of continuous updation. |
| Reconstitution of the BSE Sensitive index : Reconstitution is being carried out whenever required because some stocks might have lost their liquidity or investors may have found some new industry specific fancy. Base change calculation: The changes are in effect proportional adjustments in the base year average market value to offset price changes in market values upon which the index is based. |
National Stock Exchange of India Limited (NSE)
The NSE was set up in 1992 by leading financial institutions (IDBI, LIC, UTI, ICICI, SBI and others) and was the first one to offer screen based trading all over India. Though the impetus for its establishment came from policy makers in the country, it has been set up as a public limited company.
NSE is different from most other stock exchanges in India where membership on an exchange also meant ownership of the exchange. At the NSE, the ownership and management of the exchange are completely separate.
Governing body
| A board of directors manages the exchange. The board delegates decisions relating to market operations to an executive committee, which includes representatives from the exchange’s trading members, the public and the management. |
| Besides, the exchange operates various committees to advise it on areas such as good market practices, settlement procedures, risk containment systems etc. Industry professionals, trading members and exchange staff man these committees. The day-to-day management of the exchange is delegated to the managing director who is supported by a team of professional staff. |
There are 789 members (as of Feb 28 ’07) who can trade on both the capital market and derivatives segments. There are 150 members who can trade only on the capital market segment. There are 47 members who can trade on the capital market, wholesale debt market (WDM) and derivatives’ segments. There are 9 members who can trade on WDM and capital market segments, and 7 who can trade only on WDM. In all, there are 1002 members.
Number of listed companies
| On the capital market segment, 1,462 companies are available for trading. |
| On the wholesale debt market segment, 3,216 securities are available for trading. Capital market operations data |
| The turnover on the NSE has increased from Rs 1,805 crore in 1994-95 to Rs 15.69 lakh crore in 2005-06. |
| The average daily traded volume has increased from Rs 17 crore during 1994-95 to Rs 6,253 crore during 2005-06. |
| The total market capitalization has increased from Rs 363,350 crore as of end March 1995 to Rs 28.13 lakh crore as of end March 2006. |
| Number of shares traded has increased from 0.007 billion in November 1994 to 8.57 billion in March'06. |
| The average daily turnover in the derivatives segment was Rs 37,000 crore in Feb’07. |
On NSE, securities for account period settlement are classified as ‘EQ’ segment or ‘Normal’ segment. For book entry i.e. rolling settlement, the securities are traded in two separate segments known as ‘AE Segment’ and ‘BE Segment’. In case of AE segment, dematerialised securities are traded only in market lots, whereas in BE segment these can be traded in multiples of one share.
NSE Indices
The popular indices of NSE are :
| S&P CNX NIFTY |
| S&P CNX DEFTY |
| S&P CNX 500 |
| S&P CNX NIFTY JUNIOR |
| CNX MIDCAP |
| CNX Industry Indices |
| CNX Segment Indices |
| S&P CNX Nifty S&P CNX Nifty comprises 50 stocks and is a market capitalization weighted index. Stocks are selected based on their market capitalization and liquidity. An important criteria of S&P CNX Nifty is that the impact cost (cost of executing the entire set of S&P CNX Nifty securities) is low, making it an optimal index for derivatives trading. The S&P CNX Nifty represents about 58% the total market capitalization of the stocks listed on the Indian bourses as of Dec 29, 2006. The Impact cost (explained in latter part of the article) of S&P for a portfolio of Rs 5 million is 0.08 per cent. | ||||||
| S&P CNX Defty Defty is a dollar denominated index based on the S&P CNX Nifty. Computations are done using the S&P CNX Nifty index calculated on the NEAT trading system of NSE and USD Rupee exchange rate that is based on the real time polled data feed | ||||||
| CNX Nifty Junior CNX Nifty Junior comprises 50 stocks and is a market capitalization weighted Index. The next rung of liquid securities after the Nifty are included in the Junior Index. The Impact cost for CNX Junior Portfolio size of Rs 2.50 million is 0.14% per cent. The CNX Nifty Junior represents about 10% per cent of total market capitalization of all equity shares as on Sep 29’06. | ||||||
| S&P CNX 500 Equity Index The S&P CNX 500 Equity Index comprises 500 stocks and is market capitalization weighted. Stocks are selected based on their market capitalization, industry representation, trading interest and financial performance. However, the overriding need has been to ensure that the industry weightings in the index dynamically reflect the industry weightings in the market. The S&P CNX~500 Equity Index currently contains 72 industry groups (S&P CNX Industry Indices) representing over 90 per cent of total market capitalization and about 86% per cent of total turnover making it an optimal market benchmark. | ||||||
| S&P CNX Industry Indices The S&P CNX industry indices serve as a standard for comparison of the stock market performance of individual companies vis-a-vis their respective peer groups and also enable fund managers to benchmark NAV performance vs. specific industries. | ||||||
| CNX Mid Cap CNX Midcap is computed using market capitalisation weighted method, wherein the level of the index reflects the total market value of all the stocks in the index relative to a particular base period. The method also takes into account constituent changes in the index and importantly corporate actions such as stock splits, rights, etc without affecting the index value. The constituents and the criteria for the selection judge the effectiveness of the index. Selection of the index set is based on the following criteria :
| ||||||
| CNX Segment Indices The reform process in India has resulted in business restructuring and consolidation of the Indian corporate sector. With a view to providing investors with a better perspective of the stock market performance of the various segments of the Indian corporate sector, NSE has constructed various segment Indices such as the CNX MNC (Multinational Corporations) Index, CNX PSE (Public Sector Enterprises) Index and the CNX IBG (Indian Business Groups) Index. These indices aid investors in their asset allocation and segmental exposure decisions. | ||||||
| CNX Customized Indices Customized indices can be used for tracking the performance of the clients portfolio of stocks vis-a-vis objectively defined benchmarks or for benchmarking funds’ NAV performance to customized indices. |
The CNX Indices are computed using a market capitalization weighted method wherein the level of the Index reflects the total market value of all the stocks in the index relative to a particular base period. The method also takes into account constituent changes in the index and importantly corporate actions such as stock splits, rights, etc without affecting the index value.
Index Maintenance
The Index Maintenance Sub-committee of NSE ensures that the guidelines for index maintenance are adhered to, for example: -
| Monitoring and completing divisor adjustments in a timely manner on account of corporate actions like share changes, stock splits, mergers/amalgamations, etc |
| Monitoring and updating the indices database dynamically |
| Index Review according to laid down criteria |
S&P CNX Nifty
It is the most popular index, which represents about 58% of the total market capitalization of NSE.
The salient features of the S&P CNX Nifty are :
| Companies eligible for inclusion in Nifty must have a six monthly average market capitalisation of Rs.500 crore or more during the last six months. |
| Companies eligible for inclusion in S&P CNX Nifty should have at least 12% floating stock. For this purpose, floating stock shall mean stocks which are not held by the promoters and associated entities (where identifiable) of such companies. |
| Liquidity; all selected stocks should be below a certain impact cost, which is defined in the next paragraph. The security should have traded at an average impact cost of 0.75% or less during the last six months for 90% of the observations (instead of the earlier criteria of 1.5% or less during the last one year for 85% of the observations). |
Impact Cost Calculation - This is the percentage mark up suffered while buying or selling the desired quantity of a security compared to its ideal price
(best buy + best sell) / 2, e.g.
Bids and Offer at a particular time
| Buy (Qty.) | Buy (Price) | Sell (Qty.) | Sell (Price) |
| 1000 | 98 | 1000 | 99 |
| 2000 | 97 | 1500 | 100 |
| 1000 | 96 | 1000 | 101 |
To Buy 1500 Shares IDEAL PRICE = (99 + 98)/2 = 98.5
ACTUAL BUY PRICE = (1000 X 99 + 500 X 100)/1500 = 99.33
(FOR 1500 SHARES) IMPACT COST = (99.33 - 98.5)/98.5 X 100 = 0.84%
Base Date and Value
The base period selected for S&P CNX Nifty index is the close of prices on November 3, 1995, which marks the completion of one year of operations of NSE’s Capital Market Segment. The base value of the index has been set at 1,000 and a base capital of Rs. 2.06 trillion.
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