Security Analysis and Portfolio Management

Prof. J. Mahakud
Department of Humanities and Social Sciences
Indian Institute of Science, Kharagpur
Module No.# 01
Lecture No. # 02
Markets for Investment

In the last class, we talked about the investment philosophy and the concepts which are
related to investment in the market. So, today we will discuss about that various markets,
where generally investment are made and as well as we should also know about certain
alternatives, which are available in this different market. So, here in this context, today
we will discuss about the types of investment alternatives and the markets for
investment.
So, therefore, before going to discuss exactly about the different types of investment, we
should know that what exactly this investment alternatives are and how these investment
alternatives are defined. And what are those different scenarios in which if the investor
wants to invest, then it will be feasible for him to find out the various alternatives, which
can fulfill his objectives and as well as the returns can be maximized.
(Refer Slide Time: 01:54)

If you see this chart, it talks about basically the investment alternatives (Refer Slide
Time: 02:00 ), there are different types of the investment alternatives and as well as how
this investment alternatives can be categorized. Here if you see, that the investment can
be made on financial assets and also it can be made on real assets and again the financial
assets can be categorized into marketable instruments, non-marketable instruments and
those investment what we make on financial assets, those investments can be made
directly and as well as indirectly.
Here in the whole course on security analysis and portfolio management, where basically
we are trying to learn different concepts, different investment philosophy and we should
know that different ways how to maximize the returns. So, here basically we will deal
with more on financial assets than the real assets. So, most of the instruments or most of
the assets what we deal with security analysis and portfolio management, those are
basically the financial assets. So, the financial assets can be marketable, it can be nonmarketable, we can make the investment in direct way as well as in the indirect way.
If you see that what exactly these marketable instruments are and what exactly these
non-marketable instruments are, really is there any difference between marketable
instruments and non-marketable instruments or not. So, those questions we should know
before participating in the market.
(Refer Slide Time: 04:07)

If you see that, how this particular marketable and non-marketable assets are, the
marketable assets are basically we get from the various markets, what or which can be
managed by the investor control by the investor. And the one of the basic property of the
marketable instruments or marketable assets are without the knowledge of the particular
investor, this particular asset or the particular instrument can be traded in the market.
So, once we take a position or the investor takes a position in the market and if the
market is very much efficient or inefficient, whatever it may be and if you want to invest
in that particular market and if you know that the particular investment is marketable in
nature, then without the knowledge of that particular investor, sometimes this particular
assets can be sold, this particular asset can be bought.
Or in general we can say, those assets can be traded in the market efficiently or regularly
even without the knowledge of the investor and as we know, once we have the position
in the market and we know that particular asset is a marketable asset, then one thing
always the investor should remember that, those assets are basically non-liquid in nature.
The liquidity of that particular assets are not that much it is because, once we have the
position in the market, we invest that particular marketable assets; then in that context, it
is not possible immediately to encash or to convert those assets into the cash, which is
the basic theme or basic concept of liquidity.
If you define liquidity, how this liquidity is defined? Liquidity is basically nothing but,
how fast you can convert one particular asset into cash, but if that particular asset is
marketable asset, then it is very difficult to convert that asset into cash very quickly, that
is why most of or we can say all marketable assets are basically non-liquid in nature or
the liquidity of that particular assets are very less.
Then coming back to the non-marketable assets, the people particularly if you go back to
the pervious discussion what we have in the previous class, in that case what we have
seen there are certain investors who are very much risk averse in nature or they do not
want to take the position in the market in such a way, where the uncertainty is involved
or where there is a risk is involved.
So in that context, those people also invest in the various ways, in the various financial
assets like we say the bank deposits or we can say the post office deposits, national

saving certificates, etcetera there are various assets which are available and those assets
if you see, these are basically we do not have to manage that asset. Once we deposit that
particular money in the bank, the bank has the obligation or the financial institutions
where we have put the money, they have the obligation to invest that particular money or
to manage that particular money.
So, here the individual investor does not have to do the management aspect of that
particular asset, but the minimal amount of the return can be achieved after a certain
period of time from that particular assets which are non-marketable in nature and
anything you want to do with that asset or we can say, you will know what is happening
to that particular asset, what you have kept in the various banks or the financial
institutions or post office etcetera and what is happening to that particular assets in a
particular time period without the knowledge of the investor, without the knowledge of
the people who have kept that particular money, this particular asset cannot be traded, it
cannot be used by the other people or it cannot be used by the other investor, where the
return basically is minimal.
(Refer Slide Time: 04:07)

But, another advantage of this non-marketable assets are basically they are highly liquid,
any time those assets can be encashed, those assets can be converted into the cash that is
why the liquidity in that particular assets are quite high.

So, here if you see one particular observations, we can make whenever we compare
between marketable and non-marketable assets. So, in the non-marketable assets, the risk
is almost nil or we can say there is no such kind of risk is involved. Whenever we invest
in those particular assets, but if the particular assets are marketable, then the risk aspect
is come always involved in that.
If the risk is involved then obviously, management of those assets are quite complex or
we can say dynamic in nature. There should be certain strategy, there should be certain
philosophy, there would be certain ways through which this particular investments can
be made on marketable assets.
What if it is a non-marketable asset? Then this kind of philosophy, the complexity is not
there to manage it. Therefore, most of the discussions what we are going to do in the
security analysis and portfolio management course, basically most of the assets are
marketable. So, we deal with marketable assets because the marketable assets have the
risk, there is uncertainty involved there. So, once there is uncertainty, there is the market
factors which is involved there. So, in that context, if you observe that managing those
assets are little bit complex or we can say, it is more dynamic in nature than managing
the asset in terms of non-marketable.
(Refer Slide Time: 11:16)

So, here another categorization what we have made in this context is, direct versus
indirect investments. What basically the direct investment is for example, you are an
investor or and you want to invest in the market. So, if you are an investor and you want
to invest in the market and you have certain money to invest, then what you do? The
money is owned by you, in that money you can buy or certain assets in the market or you
can put your money in certain assets in the market to get some return in the future, but
the money is owned by you and you owned that money; once you own that money, you
put that money directly into the market, may be the best example is investment in the
stock market.
You directly put that money in the stock market in the various stocks and finally, what is
happening after a certain period of time or we can see if you say that time is the variable,
which is also very important to get the return from that particular investment. Once you
have put that particular money into that investment, then you get the return out of this
after certain period of time and already if you know that, the returns from that particular
direct investment if it is the stock or it is a bond or whatever may be, the return can be
composed of two, one is your dividend, another one is the capital gain.
So, the return what you are getting out of that particular investment that either in terms of
capital gain or in terms of the dividend, that is directly goes to you and the return what
you are getting after a stipulated time period, those return totally owned by the investor
who invest that particular money in that particular marketable assets.
But in other cases, there are some ways through which the investor can put the money in
that indirect manner and the investor does not have to do anything for the investment of
that particular asset; he does not have to put his time, he does not have to put his own
skill for managing that particular asset. So, simply he has put the money in certain assets
and once he has put that particular money or particular funds in that particular asset,
automatically that particular assets can be managed by somebody else and whatever
return will be achieved out of this, the minimal amount of the benefits or the return, what
you will get out of that, out of this, some of the returns or some of the money or some of
the benefits will go to this particular agency or particular manager or particular fund
manager or portfolio manager who manage the fund on behalf of you.

So in that case, what we have seen that in the indirect investment, the investor does not
have to manage this particular fund directly; somebody else who will manage that
particular fund on behalf of you, once it is managed and the return is realized, out of the
return some charge, some kind of fees you have to pay to the fund manager or the person
who is managing your particular money or the investment on behalf of you. And finally,
whatever remaining return in terms of the capital gain or the dividends will be there, that
will goes to the investor who has put the money into this investment.
If you see the basic difference between the direct and indirect investments are, in the
direct investment, the manager or the investor is same, but whenever we are talking
about the indirect investment, here you do not have to manage the fund, somebody else
will manage the fund on behalf of you with a minimal fee. So that, whenever we invest it
in the market, we should very much clear from the beginning whether we are trying to
manage that particular fund directly or indirectly.
Other view, both of the cases the investor owns the fund, but in one case, you owns the
fund as well as manage the fund; another case basically he owns the fund, but he does
not have to manage that particular fund. So, the biggest example or the best example in
the indirect investment is investment in various mutual funds. Mutual funds is a buzz
word, I hope all of you must be knowing about the concept of the mutual fund or you
must have heard about the concept of the mutual fund, although in the extensive
discussion on the mutual fund will be there, in the later section of this particular course.
So, here I just take that example that whenever we talk about the indirect investment,
basically the indirect investment is with the investment in the mutual fund.

(Refer Slide Time: 16:33)

So, then going back to the different classification of the financial markets, where these
marketable assets are available and as well as we can say that the different financial
markets are involved or we can get those alternatives in the different markets.
If you see this markets, where this investment alternatives are available can be
categorized into various ways. You take the example, in the first case, whenever we
classify the financial market on the basis of the claims, what exactly this claims means?
It basically deals with the different characteristics of the instruments, different properties
of the instruments which are available into the various assets in the various markets.
In that context if you see broadly, the market can be categorized into two ways: equity
market and the debt market. There is another category also there, where we can say that
derivatives market, but here this concept of the derivatives market is little bit different
from the equity market and debt market therefore, we can discuss this things in the
different manner.
But, if you see this concept of equity market, what exactly this equity market is, the
equity market is basically nothing but, who deals with the different stocks or the different
shares, but whenever we deal with the debt market, the characteristics of a different stock
or characteristics of the different shares which are traded in the equity market or the
investor takes the position in the equity market to invest in those stocks are totally

different from the characteristics of the instruments which are available in the debt
market.
So, whenever we talk about the equity market, basically it deals with the shares, this
deals with the different types of the shares and what we will discuss in the lateral phase
in this discussion, but whenever we talk about the debt market and again the debt market
basically categorized into two; one is your government securities market and another one
is the corporate debt market.
Whenever you talk about the government securities market, what exactly it happens in
that case and whenever you talk about the corporate debt market, what exactly happens
in that market, we will discuss it little bit further. But, whenever you talk about the on
the basis of the term to maturity, in the previous class, I was talking about the
requirements of the investor is very much important whenever they take the position in
market for investment; that means, somebody may need the money immediately after
certain time may be after 2 months, 6 months like this and somebody may require the
money in the long period.
So, here in the financial market those options are available for the investor. If they need
the money or they want to invest in those assets, basically which are short term in nature
and immediately that thing will be matured after a short period of time. And they can
realize their return that market is basically the short term markets and those short term
markets, where the short term instruments are traded these are basically defined as the
money market, most of the money market instruments are short term in nature.
But if the investor wants to invest for a long period of time or he wants to look for or he
is looking for those assets, which are long term in nature, this generally go to the capital
market. So, most of the cases the short term instruments are available in the money
market and the long term assets or long term instruments are available in the capital
market.

(Refer Slide Time: 16:33)

But here, the another question arises really the instrument which are available in the
money market or capital market, these are the addition to the existing market or the new
market is created there, once we take the position in the various markets or only we deal
with the existing shares, which are available in the market or we are dealing with only
the existing instrument which are available in the market.
In this context also, the market can be categorized into two; that is why we call it the
market can be categorized on the basis of the seasoning of the claims. So, here if you see
that in the context of seasoning of the claims, the market can be categorized into two;
one is defined as primary market and another one is defined as the secondary market.
Basically, the concept of primary market is nothing but, we are adding some of the new
assets or we are adding some of the new issues in the market. That is why the other name
the primary market is new issue market, if you take the example of initial public
offerings which happens in the market and it is a very popular word on the minds of the
investor and in the IPU market or the initial public offerings market is basically a
primary market.
Whenever we go to the secondary market, what exactly it happens whatever instruments
of the money has been added into the system through the new issue market or the
primary market, that money can be traded in the secondary market. So, in the context of

secondary market, what it exactly happens that only this existing shares or existing
instrument which are there in the financial market that will be only transmitted from one
investor to another investor, there is nothing to be added newly into the system in the
secondary market.
The new issues will be added into the system in the primary market, once that will be
there in the primary market, then in the first time it is introduced in the market; in the
second case, that will be transmitted from one investor or one person to another person
through the secondary market. So that is why we can say that primary market basically a
new market or the new issue market, but the secondary market basically is not a new
market, it is only transmitting this different financial assets or the marketable assets from
one investor to another investor on the basis of their objectives, the requirements and as
well as their investment philosophy.
So, here after clarifying this two things, the market also can be categorized on the basis
of the timing of delivery. What do you mean by the timing of delivery? Once we have
taken a position in the market or the investor takes a position in the market, he started
investing, he may be buying a stock or buying a bond, he started the investment and after
the investment starts, what did exactly happens? It happens that in some day that
particular investment will be over or the particular bond or particular stock will be
matured.
Once this particular thing will be matured, how this delivery will be made? How this
particular return can be realized? And when he can come to know that how much return
he is going to get out of this. So, those things basically depends on or we can define that
particular terms on the basis of the timing of delivery. So, that is why this term is defined
as a timing of delivery. On the basis of the timing of delivery, the market can be
categorized into two; one is your spot market, another one is the future market.
What exactly the spot market and the future market is. Whenever you talk about the spot
market, immediately once this particular transactions are over or once the settlement
process is over, the money will be transacted or the settlement can be done in the spot
market itself. But, whenever you talk about the future market what it happens, the
investor takes a position the so and so and so date, this particular settlement will be
made. Today you are deciding that on what day this particular settlement can be made or

particular transactions can be made. So, in that context that market is defined as the
future market.
(Refer Slide Time: 16:33)

So, in general if the popularly it is known as the derivatives market, because the pricing
of those assets is derived from the various markets like equity market and the debt
market.
Then finally, we have also the another type of market that is called exchange traded
market and over the counter market what exactly the exchange traded market is; that
means, you take the example of a stock exchange. If you want to invest in the stock
market what exactly happens, basically you do not have the investor is not required to go
to this particular floor or particular trading place, where the trading takes place; he takes
a position in his home or sitting in front of his computer and this particular trading takes
place somewhere in the stock exchange and once the trading is over or the settlement
process is over, he gets his money or he gets his return.
But the over the counter market, physically the investor has to go to the floor and he has
to make the investment or the bidding process will go on in the floor itself. So, that is
why that market is defined as the over the counter market, over the counter the trading
takes place and in the exchange traded market basically exchanges or the stock
exchanges basically play the significant role for the investment.

(Refer Slide Time: 27:16)

Then which are the instruments which are available in the various market. Already we
discussed little bit about this, in the stock market, it is stocks or the shares what we get
for the investment; in the debt market, it is the long term government securities,
debentures are nothing but, it is basically the long term bonds issued by the corporate as
well as the other corporate bonds also available.
Money market basically it deals with the money market mutual funds, sometimes we talk
about the treasury bills; treasury bills are also the short term instruments which are
traded in the money market or which are available in the money market and the
commercial papers.
And whenever you talk about the derivatives market, this various instruments which are
available are the options these are the futures, these are the swaps and within options also
you have different types of the options, you have call option, you have put option and as
well as well as also in terms of the future, we have the instrument like interested future
or we can talk about the extended there are extended future etcetera. There are various
types of future markets also available in that in the context of derived instruments, if the
instruments are different, then the investment alternatives from the derivatives market
also are different in that context.

(Refer Slide Time: 28:41)

The next question we should discuss are always, is there in the mind of the people that
whenever you talk about the primary market or secondary market what we discussed
now or already we know that the primary market is basically a new market or we can say
that it is a new issue market, but whenever you talk about the secondary market, it is
basically a market where only the transaction takes place between the existing
shareholders with the existing shares, there is nothing new to be added in that particular
market.
So, whenever we talk about the new issue market or the primary market then, which are
the instruments available and what are the different ways through which the equity
capital is raised in the primary market.
Already I have given the example of initial public offerings. So, in the first case, it is
basically the public issue, what do you mean by this public issue? The public issue is
nothing but, it is selling the securities for the first time. I hope all of you must be very
much acquainted with the initial public offerings concept, where recently also most of
the companies are raising their funds or raising their shares in terms of the public issues
or the initial public offerings. So, like the reliance and like the other company sent issue
was made by the reliance, which was not very profitable business for the reliance or
which did not click in market.

So, here what we see that there are various process through which the public issue made.
The various processes are basically the book building process and here we will not
discuss about the what the different steps of the book building process. Further, in the
various in the further sessions, we would discuss about the what exactly the book
building process is.
But here, basically if you see, the public issue is nothing but, it is the selling the
securities for the first time in the market and another type of issue also companies make
in the primary market, that is defined as right issue. A right issue is nothing but, it is
issuing rights to the existing share holder that means, whenever they go for the public
issue, what they do out of the total shares, what they raised from the market through this
initial public offerings, out of them certain amount of the assets is there is through the
right issue.
What exactly this right issue means, whatever existing shareholders are there in the
company and whoever their existing shareholders are available in the company, what this
companies do? They generally give certain priority to the existing shareholder or they
provide certain rights to the existing shareholder to own that particular shares, it may not
be open to the common public, it is only open to this particular investors which are
already existing in that particular company. So, that is why we call it the right issues.
Then another issue is the private placement. It is basically what exactly this private
placement is, the private placement is that, whenever you go for the public issues or the
any kind of new addition to the system then you give the priority, you sell the securities
to different financial institutions, mutual fund and etcetera in terms of this particular new
issues or in terms of their primary issues, what they are raising into the market in that
particular time. Here what we can say that, the return investor cannot invest in those kind
of assets, where the private placements are made.
And another way of raising the issue is basically preferential allotment, the preferential
allotment is basically it is very much selective only for the listed companies and only the
listed companies can go for the preferential allotment. The companies which are listed in
the stock exchanges they can only go for this preferential allotment, the other companies
the companies, which are not listed in the stock exchange it is very difficult to raise the
money through this private placements. And basically if you observe, the value of the

private placements in general are more than the value of the initial public offerings or it
is always higher than the value of the initial public offerings. So, this is the notion
knowledge we have.
(Refer Slide Time: 33:36)

But, clearly if you want to know, what exactly this difference between the private
placement and the preferential allotment then, we can see this thing that this private
placements is basically referred to sale of equity or equity related instruments of our
unlisted company or sale of debentures of a listed or unlisted company; that means,
whenever you talk about the private placement, it refers to equity or equity related
instruments of our unlisted company private placements are related to sale of equity of
unlisted company, but whenever we talk about the debentures it can be both listed and
unlisted.
But whenever you talk about the preferential allotment, either it is in terms of equity or
we can say equity related to instruments, they always issued from a listed company. So,
the private placement if it they raising in terms of equity, it should come from the
unlisted company, but if it is a debenture or the bonds, it can be also from a sale of
debentures, if it is talking about the bonds or debenture it can be listed and as well as
unlisted. But whenever you talk about the preferential allotment, it is basically the sale of
equity or equity related instruments of unlisted company. So, this is the basic difference
between the private placement and the preferential allotment.

(Refer Slide Time: 34:52)

Then after discussing the various instruments or the different ways through which this
primary market as raised the money from the market or we can get the different
instruments in the primary market, then we can discuss about the secondary market.
Already what I discussed with you that, in the secondary market only the existing
securities are traded or existing securities are issued, that means existing securities issued
in the primary market are traded in the secondary market. So, this market enables the
participants who held securities to adjust their holdings and response to changes in their
assessment of risk and returns.
Already I told that, whenever one investor takes the different position in the market. So,
taking the different position in the various market is basically depends on his risk return
profile or the risk apatite in nature or we can say that how much risk he can take into the
into the market and how much return he can expect from the market and accordingly by
assuming the risk return trade off, they generally decide or the investor can decide that
where to invest where not to invest.
The secondary market operation basically can be made in both the markets what we have
already discussed, it can be operated through over the counter market or in short we call
it the OTC market or the exchange traded market, in both the markets, the secondary
market transactions takes place.

(Refer Slide Time: 36:39)

Already little bit we know about this, that exchange traded market are basically the stock
exchanges, where this securities are traded in that there is no need to go to the floor
directly or the physical presence of the investors are not required, but whenever you talk
about the OTC markets, these are basically the informal markets where the trades are
negotiated.
The traders or the investor goes to the market, generally the bidding process goes on
there, there is a ask price, there is a bid price and where this particular bid and ask price
match to each other or they can be leads to a negotiation point, in that point only the
trade takes place. So, that is why we call it OTC market are the informal markets and
most of the government securities are traded in the OTC market or the over the counter
market and all these spot trades, where the securities are traded for immediate delivery
and payment takes place in this market there itself.
But if you talk about the take the example of the government securities in terms of OTC
market, what did exactly happens that, basically it is action process which is made by the
Reserve Bank of India. And they generally go by the optioning of various dated
securities and as well as treasury bills and in the option process goes on weakly and
accordingly, the different financial institutions or the investor goes for optioning and the
bidding process goes on there and once this negotiation has been made, this particular
trading can be taken place.

(Refer Slide Time: 38:31)

Now, we are talking about the operations of secondary market, how the secondary
market works. If you observe that secondary market operation basically has two steps:
one is your trading, another one is the settlement. Once the trading takes place after
certain time, the settlement takes place for the delivery.
So, the trading things whenever you talk about here, the trade can be takes place in the
open outcry system and as well as in the screen-based system and the settlement in India
particularly we have the three type of mechanism, we have account period settlement
system, we have carry forward mechanism, we have rolling settlement system, but
gradually those all those systems are not operating at a time basically these are the
different developments in the settlement process over the period. So, one by one if we
discuss, we can come to know what exactly they are.

(Refer Slide Time: 39:33)

Whenever we talk about the open outcry system, what basically the open outcry system
is? Under this system traders shout and resort to signals on the trading floor of the
exchange which consists of several trading posts for different securities. Buyers make
their bids and seller make their offers and bargains are closed at mutually agreed upon
prices; that means, in the open outcry system the physical presence of the investors are
required.
Once this investors are physically present in that trading floor and they take the position
in the market. So, basically the buyers go for bidding that particular different assets and
the sellers basically go for asking this particular price. And once this the action process
goes on or the bidding process goes on, they generally negotiate to each other, once the
negotiation is over and they are agreed upon a particular price, this particular
transactions can be taken place.
But here what we can say that, this physical presence of the investors are required in
open outcry system and the investor has to go to the floor and take the position and the
buying and selling process should go on.

(Refer Slide Time: 41:07)

But whenever we talk about screen-based system, what did happens in the screen-based
system? In the screen-based system basically buyers and sellers place their orders on the
computer already, what I told they can be limit order or the best market price order there
are two types of the orders what we have in the screen-based system.
The computer constantly tries to match mutually compatible orders on price in time
priority; that means, when if you want to buy it you have given some kind of price if this
much price is available I can go and buy this particular asset and who wants to sell it
already he had send his quotation to the stock exchange that I want to sell this particular
asset or particular stock if the price is this much.
So, what this particular process this screen-based system does basically screen-based
system tries to match or which try to find out, the particular people or particular
investors, where the both buying price and selling price can be matched and this
particular matching may be on the basis of the price and as well as the time. So, if both
price and time is perfectly matched, then this particular transaction can be taken place.
So, here already what I told that the order can be limit order or the best market price
order, the limit order book or the list of unmatched limit orders is displayed on the
screen. The limit order in this sense basically what happens, this investor gives the

particular price limit if price is only up to this much, then I can buy it or the seller can
say, if the price is up to this much then only I can sale. So, that is called the limit order.
But, whenever you talk about the best market price order, basically it is defined as the
investor generally always wants to buy or sale on the basis of the best market price
which is available in that particular time. There is no such limit is available for that, it is
basically related to the market price or the best market price is availability in that
particular stipulated time period.
(Refer Slide Time: 43:36)

So, that is why in the screen-based system, there is no need of the physical presence of
the investor into the trading floor and this screen-based system trading is started in India
in November 4 1994 in NSC. And afterwards, it is quite popular in most of the countries
and in India also it is quite popular because why it is popular? It is popular or it is we can
say that is most used type of system it is because it increases efficiency, it generally
saves the time, there is no need to go to the floor, there is no need to go to bargain with
the different investors or for a agreeable price or we can say that for a matching price.
So, that is why it increases the efficiency.
Because we can get the all the information from that trading computer base system itself
and once we have the information what we can do, here itself we can take our positions
in the various places to maximize our return. So that is why the screen-based system

basically increases the efficiency into the market or into the system, it increases the
confidence in the market. Why it increases the confidence in the market? Because all the
information are available there itself. So, all the investor can come to know which stock
is available at what price or which asset is available at what price, accordingly they can
choose on the basis of their risk return profile.
It is definitely transparent, because the transparency is maintained because you have to
provide all the information in that itself and the regulator takes care of those things,
whenever they take the position into the screen-based system. It reduces the brokerage
cost, it reduces the paper work and also it reduces the bad paper risk, there is a
probability of losing the paper, there is a probability of destruction of the paper. So, we
can avoid those things, once the computer based system is working and here if you see
the data, that almost most of the transaction cost, the huge amount of the transaction
costs have gone down like anything over the periods in the context of India, once this
screen-based system is started into the Indian stock market.
(Refer Slide Time: 45:59)

The another step is the settling. Once the trading takes place, how the settlings are made?
The settling basically in the traditional way how the settling was doing, that it is
basically based on the physical delivery. The seller basically whenever you wants to sell
some of the stock, the seller goes to the sellers broker, maybe he has the broker, he goes
to the broker, then that sellers broker finds out the buyers broker and finally, the buyers

broker will look for a buyer, then only the settling takes place; that means, first the
process should go from seller to sellers broker, sellers broker to buyers broker, then
buyers broker to buyer.
But in the modern system, how the settling takes place? It is basically takes place in the
basis of the electronic delivery. What this electronic delivery is? The electronic delivery
is basically facilitated by the depositories and what the depository is defined and how
this depository is defined? The depositary which is an institution, which dematerializes
physical certificates and effect transfer of ownership by electronic book entries. For
example, you have bought a stock or you have sold a stock and once this particular
process has happened in that stock exchange, then what has happened that day it the role
of depositary which place the significant role by transferring the owner share from one
invertors to another investor.
So, that is why in the modern electronic delivery system, always the depositaries play the
significant role for settling of that particular investment or the trading of that particular
investment. So, the examples of depositaries in India are National Securities Depositary
Limited NSDL and the Central Securities Depositories Limited that is the CSDL.
(Refer Slide Time: 48:01)

Over the period, how the settlement procedure works in India? Previously whenever the
particular exchange traded system is started or we can say that, whenever you do the

trading in the stock exchanges or do the trading in the equity market, previously this
carry forward system or carry forward mechanism was working into the Indian market.
So, in the carry forward mechanism what it happens? When a bull buys, bull means the
particular investor, who always expects that the price will be go up and the bear means
the particular investor, who always expects that the price will go down. When a bull buys
in the anticipation of an immediate rise in price, but finds at the end of the accounting
period that the price has not risen; he may either pay the shares and take delivery or he
has the option, that he may carry over his transaction to the next accounting period buy
paying the carry over charge, that is why this concept is recorded the Seedha badla
system or we can say that the Seedha badla to the seller. That means, he has the option
he may go for the realization of the delivery or he may also carry over his transaction to
the next period by paying the carry over charges to the seller.
But, if it is just opposite in that case of bears, what happen? When a bear sells in
anticipation of a fall in prices in the immediate future, but the fall does not happen within
the accounting period. He has option to borrow or buy the shares for delivery or have his
sales carried over to the next accounting period on payment of Undha badla or
backwardation charges to the buyer. So, that system was very old system in an Indian
share market, where the carry forward mechanism was working.
But, whenever we go for this, gradually it has gone to the account period settlement
system; in the account period settlement system what it exactly happens that the
settlement takes place may be after 15 days or after 20 days, but previously it has come
down to a week, but now it is not working, basically now we have a rolling settlement
system.

(Refer Slide Time: 50:38)

(Refer Slide Time: 51:10)

In the rolling settlement system, the settlement generally carried out gradually and now
we are going for T plus 2 if the transaction is at the time of T, your settlement can be
made at the period T plus 2 since April 1 2003. And when the system prevails in the
market, it enhance the liquidity of the market, it help to achieve the true price discovery,
it may reduce the price fluctuation, it increases the market efficiency as well as it reduces
the market manipulation because almost all the transaction takes place in a very short
period of time.

So, whenever you talk about the transactions, the delivery can be made immediately on
the spot delivery, delivery and payment are made on the same day of the contract or in
the next day, it can be hand delivery, delivery and payments are made when it is
stipulated the time is fixed from the beginning, but the special delivery, it is beyond 14
days with the permission of the stock exchange. This transaction can be a delivery can be
takes place after 14 days also if the stock exchange wants.
(Refer Slide Time: 51:42)

(Refer Slide Time: 51:59)

There is another concept which is related to this, we call it the margin trading. This is the
part of the transaction value that customer has equity in the transaction. So, where this
margin is used to buy more, even if you do not have the money and as well as by
borrowing, you can also make the transactions. The concepts which are related to the
margin are initial margin, how do you define this initial margin? It is basically amount
the investor puts up or the value of the transaction or it is the part of the transactions
value, the customer must pay to initiate the transaction with the part being borrowed
from the broker. From the beginning, you have to put this much money if you want to
trade with.
Then another one is the maintenance margin, the maintenance margin is nothing but, the
percentage of the securities value that must be on hand as equity. Basically, we can read
elaborately about this thing in the further sessions. Then margin call basically, it is the
demand from the broker for a additional cash or securities as a result of the actual margin
declining below the maintenance margin; if the price fluctuations are more, if this
particular initial margin falls below certain level, then they can go for a margin call.
(Refer Slide Time: 52:56)

Short selling - what exactly short selling means in a normal transaction, a security is
bought or owned because the investor believes the price is likely to rise, eventually the
security is sold and the position is closed out; that means, first you buy it then you sell,
but in the short selling basically, it involves selling the security because of believe that

price should decline and buying back the security later to close the position, first you sell
then you buy. So, it is just opposite from the normal investment procedure.
(Refer Slide Time: 53:29)

What exactly this actual selling and buying procedure? First what we have to do, locate a
broker, place a order, then what you can do? Order may be a limit order or it may be best
market price order, then once this order will be matched, then the trading will takes
place. Then finally, in the T plus 2 settlement process will go on and the procedure for
selling it is the same, placement of the order, sale order, then you execute the order and
the other procedures are same in the buying process.

(Refer Slide Time: 53:58)

So, in the mutual fund where it is we do the indirect investment, there are various funds
available close ended and open ended, we have a separate session on mutual fund where
we will read extensively, but here the difference between the close ended and open ended
are subscription period is limited for close ended, no right to withdraw the fund when
they like and the close end funds are generally the fixed maturity period and they are
listed in the stock market the open ended funds are not listed in the stock market.
(Refer Slide Time: 54:26)

So, mutual fund schemes are basically debts scheme; it can be equity scheme, it can be
balanced scheme. So, in the debt scheme basically all are equity, in the debt scheme
basically it is 100 percent debt instruments like the corporate bonds etcetera and the
balanced it is 60 percent maximum equity or 40 percent debt or if debts 60 percent and
40 percent is the equity, that way generally it is made in the balanced fund.
(Refer Slide Time: 55:12)

Why mutual fund basically, why we invest in the indirect manner? Because if you do not
have the expertise for management or to get some tax advantage because under the
various tax rules. So, we have the tax advantage, we have if you invest in the mutual
funds. So, the people who basically invest in the mutual fund, if they do not have that
much amount to invest directly into the market because of the high transaction cost, if
they do not have time to invest in the market, if they do not have expertise to invest in
the market directly and as well as if they have huge stocks in hand to invest.
Therefore, if certain investor does not have that much time to invest directly they can go
to the mutual fund. In general, equity investment or we can say any other investment in
the financial market always goes to the various process and it can be invested in the
various markets and always the basic objective of the investor to maximize the return
with a given constraints. In the constraints are related by age related to time etcetera and
as well as the risk appetite of the investor. Further, we will discuss about the different

concept of efficiency and how this particular market works and when we can maximize
the return in the various conditions.