merits capital

8/6/2019 Merits Capital

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SUMMER INTERNSHIP PROJECT

ON

STUDY OF DERIVATIVES

AT

MERITS CAPITAL MARKET SERVICES PVT. LTD.

Submitted in the partial fulfillment of the PGDM program

Submitted byPrateek Batra

18/038

Corporate Mentor Faculty Mentor

Mr. Saurabh Shrivastav Ms. Shalini Vermani

Relationship Manager Professor

APEEJAY SCHOOL OF MANAGEMENT

NEW DELHI

JULY 2011


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ACKNOWLEDGEMENT

Every individual from dusk to dawn of life need some co-operation from the surrounding

environment. My self too is not an exception to others. It is very difficult to complete a

project work without the help of some well-wisher.

I consider it is a great privilege to acknowledge my gratitude to

Mr. Dilmeet Singh (M.D.) Mr. Guneet Singh(Vice President-Operations) and

Mr.Bishan Singh Negi(Branch Head)for giving his kind cooperation and valuable

guidance and information he has.

I am indeed grateful to Mr. Saurabh Shrivastav(Relationship Manager) Mr. Sunil

(Relationship Manager) for helping me in the collection of valuable information about

the topic selected and also for his guidance in the preparation of the project.

I am greatly indebt to all the employees of Merits Capital. For their kind co-operation

during collection of data and information that helped me in conducting such project-

work.

I also express my sincere thanks to Prof. Alok Saklani (Director)

Ms. Manupriya Bali (placement officer) Ms. Divya Jindal (placement committee

incharge) for giving me opportunity to undertake the project work and Guide for their

inspiring guidance and timely suggestions during this project.

Prateek Batra


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DECLARATION

I undersigned here by stating that the report entitled STUDY OF DERIVATIVESis a

genuine and bonafied work prepared by me under a guidance of Mr. SAURABHSHRIVASTAVA (Relationship Manager)

The empirical findings in this project report are based on the data collected by myself.

The matter presented in this report is not copied from any source. I understand that any

such copy is liable to the punishment in way the university authorities deem fit.

This project report is submitted to APEEJAY SCHOOL OF MANAGEMENTin a partial

fulfillment of the course of.

POST GRADUATE DIPLOMA IN MANAGEMENT

PLACE: NEW DELHI

PRATEEK BATRA


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TABLE OF CONTENTS

PARTICULARS PAGE NUMBERExecutive Summary 7

Objective Of Study 8

Chapter 1 - Introduction to Topic 9 21

Chapter 2 Company Profile

Background

Promoters

Vision and Mission

Product and Services

Marketing Strategies

Competitors

Taxation Policies

HR Policies

Major Problems

Achievements

Prospects

22 50

Chapter 3 About the Project 51 53

Chapter 4 Literature Review 54 62

Chapter 5 Research Methodology 63 65

Chapter 6 Data Analysis and Findings 66 73

Chapter 7 Conclusions 74 80

Chapter 8 Recommendations 81 82

Chapter 9 Bibliography 83 84

Chapter 10 - Glossary 85 91


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EXECUTIVE SUMMARY

Conceptually the mechanism of stock market is very simple. People who are exposed to

the same risk come together and agree that if anyone of the person suffers a loss the otherwill share the loss and make good to the person who lost.

The initial part of the project focuses on the job and responsibilities I was allotted as a

summer trainee. It also makes the readers aware about the techniques and methodology

used to bring this report alive. It also describe about the objective of this study.

It also enlightens the readers about Merits Capital strategies to acquire new customers.

Further the project tells us about the profile of the company (Merits Capital). It provides

knowledge to the readers regarding the companys history, mission, vision, customer base

and the reasons to be associated with the company. Also it gives special emphasis on the

selling of products and management of the company.

The next few chapters are devoted to the study of the Derivative Market and Derivative

Instruments in a very basic way. It also suggests some of the strategies that can be

applied to earn more even when the market is too much volatile. The readers can also

find the comparative analysis of the Derivative Market and the Cash Market in the Indian

context.

.

The next part of the project throws light upon my findings and analysis about the

company and the suggestions for the company for better performance.


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OBJECTIVE OF THE STUDY

To find out whether the Derivative Instruments are applicable in the Indian Stock Market

which can work both in good and bad times so that it can minimize our risk and

maximize our returns. As a result one can have conviction in his portfolio in the hugely

volatile stock market because a difficult and serious problem for all investors today is that

there is entirely too much free information, hype, promotion, personal opinion, and

advice about derivative instruments are there in stock market. One get it from friends,

relatives, people at work, the Internet, brokers, stock analysts, advisers, entertaining cable

TV market programs, and other media. It can be very risky and potentially dangerous.

Realistically, there are not too many people one can listen to if he want to avoid

confusing, contradictory, and faulty personal market opinions. So one need to confine

himself to just a very few sources of relevant facts and data and a sound system that has

proven to be accurate and profitable over time.

Therefore, the objective of the Dissertation is to do in depth research on these derivative

instruments.


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CHAPTER 1

INTRODUCTION TO TOPIC


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SHARES

A joint stock company divides its capital into units of equal denomination. Each unit is

called a share. These units are offered for sale to raise capital. This is termed as issuing

shares. A person who buys share/shares of the company is called a shareholder, and by

acquiring share or shares in the company becomes one of the owners of the company

INDUSTRY OVERVIEW

A Brief History of Stock Exchanges

Do you know that the world's foremost marketplace New York Stock Exchange (NYSE),

started its trading under a tree (now known as 68 Wall Street) over 200 years ago?

Similarly, India's premier stock exchange Bombay Stock Exchange (BSE) can also trace

back its origin to as far as 125 years when it started as a

voluntary non-profit making association.

You hear about it any time it reaches a new high or a new

low, and you also hear about it daily in statements like

'The BSE Sensitive Index rose 5% today'. Obviously,

stocks and stock markets are important. Stocks of public

limited companies are bought and sold at a stock

exchange. But what really are stock exchanges? Known

also as tNews on the stock market appears in different media every day. he stock market

or bourse, a stock exchange is an organized marketplace forsecurities (like stocks,bonds,

options) featured by the centralization of supply and demand for the transaction of orders

by memberbrokers, for institutional and individual investors. The exchange makes

buying and selling

All stock exchanges perform similar functions with respect to the listing, trading, and

clearing of securities, differing only in their administrative machinery for handling these

functions. Most stock exchanges are auction markets, in which prices are determined by

competitive bidding. Trading may occur on a continuous auction basis, may involve
http://en.wikipedia.org/wiki/Capital_%28economics%29http://www.thebizpapertoday.com/tbtstock/?http://www.ulearntoday.com/magazine/physics_article1.jsp?FILE=stockglossary#7http://www.ulearntoday.com/magazine/physics_article1.jsp?FILE=stockglossary#2http://www.ulearntoday.com/magazine/physics_article1.jsp?FILE=stockglossary#6http://www.ulearntoday.com/magazine/physics_article1.jsp?FILE=stockglossary#3http://www.ulearntoday.com/magazine/physics_article1.jsp?FILE=stockglossary#5http://www.ulearntoday.com/magazine/physics_article1.jsp?FILE=stockglossary#5http://www.ulearntoday.com/magazine/physics_article1.jsp?FILE=stockglossary#3http://www.ulearntoday.com/magazine/physics_article1.jsp?FILE=stockglossary#6http://www.ulearntoday.com/magazine/physics_article1.jsp?FILE=stockglossary#2http://www.ulearntoday.com/magazine/physics_article1.jsp?FILE=stockglossary#7http://www.thebizpapertoday.com/tbtstock/?http://en.wikipedia.org/wiki/Capital_%28economics%29


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brokers buying from and selling to dealers in certain types of stock, or it may be

conducted through specialists dealing in a particular stock.

But where did it all start? The need for stock exchanges developed out of early trading

activities in agricultural and other commodities. During the middle Ages, traders found it

easier to use credit that required supporting documentation of drafts, notes and bills of

exchange.

India's other major stock exchangeNational Stock Exchange (NSE), promoted by leading

financial institutions, was established in April 1993. Over the years, several stock

exchanges have been established in the major cities of India. There are now 23

recognised stock exchanges Mumbai (BSE, NSE and OTC), Calcutta, Delhi, Chennai,

Ahmedabad, Bangalore, Bhubhaneswar, Coimbatore, Guwahati, Hyderabad, Jaipur,

Kochi, Kanpur, Ludhiana, Mangalore, Patna, Pune, Rajkot, Vadodara, Indore and

Meerut. Today, most of the global stock exchanges have become highly efficient,

computerised organisations. Computerised networks also made it possible to connect to

each other and have fostered the growth of an open, global securities market.

INDIAN STOCK MARKET-A brief profile

The two main stock markets of India are:-

NSE

BSE

In all there are 23 stock exchanges in India, but the two most popular amongst all of them

are:-

National Stock Exchange(NSE)

Bombay stock exchange(BSE)

Now, lets discuss the history, functionality and other important details about these two

important stock exchanges of India.
http://www.ulearntoday.com/magazine/physics_article1.jsp?FILE=stockglossary#1http://www.ulearntoday.com/magazine/physics_article1.jsp?FILE=stockglossary#1http://www.nseindia.com/us/usindex.htmhttp://www.nseindia.com/us/usindex.htmhttp://www.ulearntoday.com/magazine/physics_article1.jsp?FILE=stockglossary#1http://www.ulearntoday.com/magazine/physics_article1.jsp?FILE=stockglossary#1


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History of BSE and its brief profile:-

Indian stock markets are one of the oldest in Asia. Its history dates back to a 200 years

ago. The East India Company was the dominant institution in those days and business inits loan securities used to be transacted towards the end of eighteenth century.

By 1830s business on corporate stocks and shares in the bank and cotton took place in

Bombay. The 1850s witnessed a rapid development of commercial enterprise and the

brokerage business attracted many men into this field and by 1860 the number of brokers

increased to 60.

In 1860-61, the American civil war broke out and cotton supply from United States

stopped; and thus the share mania in India begun, due to which the share brokers

increased to about 200 to 250.

At the end of the American civil war, the brokers who thrived out of this war in 1874,

found a place in a street, where they would easily assemble and transact business. This

street is nowadays, popularly known as DALAL STREET.

In 1887, they formally established in Bombay, and were known as Native Shares and

Stock Brokers Association.

In 1895, it acquired a premise in the same street and finally was inaugurated in 1899

with the name Bombay Stock Exchange(BSE).

In this way the stock market at Bombay was consolidated.

NSE:-

With the liberalization of Indian economy it was found necessary to lift the Indian

stock markets on par with the international standards. The NSE was incorporated in 1992

by industrial development bank of India, industrial credit and Investment Corporation of

India, industrial finance corporation of India, all insurance corporations, selected

commercial banks and others.


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NSE is Indias leading stock exchange covering more than 160 cities and towns across

the country. It provides the modern fully computerized trading system designed to offer

investors across the country a safe and easy way to invest to liquidate investment and

securities.

Investors in many areas of country did not have the same access and opportunity to trade

so there arise the need for setting up the national stock exchange. The NSE network has

been designed to provide equal access to investors from anywhere in India and to be

responsive to their needs.

On its recognition as a stock exchange under the Securities Contract Act, 1956 in April

1993, NSE started operations in the Wholesale Debt Market (WDM) segment in June

1994. Capital market (equities) segment commenced operations in November 1994, and

operations in derivative segment started in June 2000.

NSE started trading in the capital market segment on November3, 1994 and within one

year became the largest exchange in India, in terms of volumes transacted. During the

year 2005-06 NSE reported, a turnover of Rs 1,569,556 crores in the equity segment.


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Online trading process

The various transactions involved in online trading can be shown from the point of view

of the

Client

Broker

Stock Exchange


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CAPITAL MARKET

A capital market is a market forsecurities (debt orequity), where business enterprises

(companies) and governments can raise long-term funds. It is defined as a market inwhich money is provided for periods longer than a year as the raising of short-term funds

takes place on other markets (e.g., the money market). The capital market includes

the stock market (equity securities) and thebond market (debt). Financial regulators, such

as the UK's Financial Services Authority (FSA) or the U.S. Securities and Exchange

Commission (SEC), oversee the capital markets in their designated jurisdictions to ensure

that investors are protected against fraud, among other duties.

Capital markets may be classified asprimary markets and secondary markets. In primary

markets, new stock or bond issues are sold to investors via a mechanism known

as underwriting. In the secondary markets, existing securities are sold and bought among

investors or traders, usually on a securities exchange, over-the-counter, or elsewhere.

DERIVATIVE MARKET

A derivative is a financial instrument whose value depends on underlying variables. The

most common derivatives are futures,options, and swaps but may also include other

tradeable assets such as a stockorcommodity or non-tradeable items such as the

temperature (in the case ofweather derivatives), the unemployment rate, or any kind of

(economic) index. A derivative is essentially a contract whose payoff depends on the

behavior of a benchmark.

One of the oldest derivatives is rice futures, which have been traded on the Dojima Rice

Exchange since the eighteenth century

Derivatives are broadly categorized by the relationship between the underlying asset and

the derivative (e.g., forward,option,swap); the type of underlying asset (e.g.,equity

derivatives, foreign exchange derivatives,interest rate derivatives, commodity derivatives

orcredit derivatives); the market in which they trade (e.g., exchange-traded orover-the-

counter); and their pay-off profile.
http://en.wikipedia.org/wiki/Markethttp://en.wikipedia.org/wiki/Security_%28finance%29http://en.wikipedia.org/wiki/Debthttp://en.wikipedia.org/wiki/Equity_%28finance%29http://en.wikipedia.org/wiki/Corporationhttp://en.wikipedia.org/wiki/Governmenthttp://en.wikipedia.org/wiki/Money_markethttp://en.wikipedia.org/wiki/Money_markethttp://en.wikipedia.org/wiki/Stock_markethttp://en.wikipedia.org/wiki/Bond_markethttp://en.wikipedia.org/wiki/Financial_Services_Authorityhttp://en.wikipedia.org/wiki/U.S._Securities_and_Exchange_Commissionhttp://en.wikipedia.org/wiki/U.S._Securities_and_Exchange_Commissionhttp://en.wikipedia.org/wiki/Primary_markethttp://en.wikipedia.org/wiki/Secondary_markethttp://en.wikipedia.org/wiki/Underwritinghttp://en.wikipedia.org/wiki/Securities_exchangehttp://en.wikipedia.org/wiki/Over-the-counter_%28finance%29http://en.wikipedia.org/wiki/Financial_instrumenthttp://en.wikipedia.org/wiki/Underlyinghttp://en.wikipedia.org/wiki/Futures_contracthttp://en.wikipedia.org/wiki/Option_%28finance%29http://en.wikipedia.org/wiki/Swap_%28finance%29http://en.wikipedia.org/wiki/Stockhttp://en.wikipedia.org/wiki/Commodityhttp://en.wikipedia.org/wiki/Weather_derivativehttp://en.wikipedia.org/wiki/Index_%28economics%29http://en.wikipedia.org/wiki/Dojima_Rice_Exchangehttp://en.wikipedia.org/wiki/Dojima_Rice_Exchangehttp://en.wikipedia.org/wiki/Forward_contracthttp://en.wikipedia.org/wiki/Option_%28finance%29http://en.wikipedia.org/wiki/Swap_%28finance%29http://en.wikipedia.org/wiki/Equity_derivativehttp://en.wikipedia.org/wiki/Equity_derivativehttp://en.wikipedia.org/wiki/Foreign_exchange_derivativehttp://en.wikipedia.org/wiki/Interest_rate_derivativehttp://en.wikipedia.org/wiki/Credit_derivativeshttp://en.wikipedia.org/wiki/Over-the-counter_%28finance%29http://en.wikipedia.org/wiki/Over-the-counter_%28finance%29http://en.wikipedia.org/wiki/Over-the-counter_%28finance%29http://en.wikipedia.org/wiki/Over-the-counter_%28finance%29http://en.wikipedia.org/wiki/Credit_derivativeshttp://en.wikipedia.org/wiki/Interest_rate_derivativehttp://en.wikipedia.org/wiki/Foreign_exchange_derivativehttp://en.wikipedia.org/wiki/Equity_derivativehttp://en.wikipedia.org/wiki/Equity_derivativehttp://en.wikipedia.org/wiki/Swap_%28finance%29http://en.wikipedia.org/wiki/Option_%28finance%29http://en.wikipedia.org/wiki/Forward_contracthttp://en.wikipedia.org/wiki/Dojima_Rice_Exchangehttp://en.wikipedia.org/wiki/Dojima_Rice_Exchangehttp://en.wikipedia.org/wiki/Index_%28economics%29http://en.wikipedia.org/wiki/Weather_derivativehttp://en.wikipedia.org/wiki/Commodityhttp://en.wikipedia.org/wiki/Stockhttp://en.wikipedia.org/wiki/Swap_%28finance%29http://en.wikipedia.org/wiki/Option_%28finance%29http://en.wikipedia.org/wiki/Futures_contracthttp://en.wikipedia.org/wiki/Underlyinghttp://en.wikipedia.org/wiki/Financial_instrumenthttp://en.wikipedia.org/wiki/Over-the-counter_%28finance%29http://en.wikipedia.org/wiki/Securities_exchangehttp://en.wikipedia.org/wiki/Underwritinghttp://en.wikipedia.org/wiki/Secondary_markethttp://en.wikipedia.org/wiki/Primary_markethttp://en.wikipedia.org/wiki/U.S._Securities_and_Exchange_Commissionhttp://en.wikipedia.org/wiki/U.S._Securities_and_Exchange_Commissionhttp://en.wikipedia.org/wiki/Financial_Services_Authorityhttp://en.wikipedia.org/wiki/Bond_markethttp://en.wikipedia.org/wiki/Stock_markethttp://en.wikipedia.org/wiki/Money_markethttp://en.wikipedia.org/wiki/Governmenthttp://en.wikipedia.org/wiki/Corporationhttp://en.wikipedia.org/wiki/Equity_%28finance%29http://en.wikipedia.org/wiki/Debthttp://en.wikipedia.org/wiki/Security_%28finance%29http://en.wikipedia.org/wiki/Market


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Derivatives are financial contracts, which derive their value off a spot price time-series,

which is called "the underlying". The underlying asset can be equity, index, commodity

or any other asset. Some common examples of derivatives are Forwards, Futures, Options

and Swaps.

Derivatives help to improve market efficiencies because risks can be isolated and sold to

those who are willing to accept them at the least cost. Using derivatives breaks risk into

pieces that can be managed independently. From a market-oriented perspective,

derivatives offer the free trading of financial risks.

IMPORTANCE OF DERIVATIVES

Credit Risk: This is the risk of failure of counterparty to perform its obligation as per the

contract. Also known as default or counterparty risk, it differs with different instruments.

Market Risk: Market risk is a risk of financial loss as a result of adverse movements of

prices of the underlying asset/instrument.

Liquidity Risk: The inability of a firm to arrange a transaction at prevailing market

prices is termed as liquidity risk. A firm faces two types of liquidity risks

1. Related to liquidity of separate products

2. Related to the funding of activities of the firm including derivatives.

Legal Risk: Derivatives cut across judicial boundaries, therefore the legal aspects

associated with the deal should be looked into carefully.


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TYPES OF DERIVATIVES

Forwards

Futures

Options

Swaps

Who are the operators in the derivatives market?

Hedgers - Operators, who want to transfer a risk component of their portfolio.

Speculators - Operators, who intentionally take the risk from hedgers in pursuit of

profit.

Arbitrageurs - Operators who operate in the different markets simultaneously, in

pursuit of profit and eliminate mis-pricing.

What is a Forward contract?

In a forward contract, two parties agree to do a trade at some future date, at a price and

quantity agreed today. No money changes hands at the time the deal is signed.

What are Index Futures?

Index Futures are Future contracts where the underlying asset is the Index. This is of

great help when one wants to take a position on market movements

What are the uses of Index Futures?

Index futures can be used for hedging, speculating, arbitrage, cash flow management and

asset allocation.


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HEDGING:

What is hedging?

Hedging is a mechanism to reduce price risk inherent in open positions. Derivatives are

widely used for hedging. A Hedge can help lock in existing profits. Its purpose is to

reduce the volatility of a portfolio, by reducing the risk.

Hedging does not mean maximization of return. It only means reduction in variation of

return. It is quite possible that the return is higher in the absence of the hedge, but so also

is the possibility of a much lower return

What are the general hedging strategies?

The basic logic is "If long in cash underlying - Short Future and If short in cash

underlying - Long Future". If you have bought 100 shares of Company A and want to

Hedge against market movements, you should short an appropriate amount of Index

Futures. This will reduce your overall exposure to events affecting the whole market

(systematic risk). In case a war breaks out, the entire market will fall (most likely

including Company A). So your loss in Company A would be offset by the gains in your

short position in Index Futures.

Who are hedgers, speculators and arbitrageurs?

Hedgers wish to eliminate or reduce the price risk to which they are already exposed.

Speculators are those class of investors who willingly take price risks to profit from price

changes in the underlying. Arbitrageurs profit from price differential existing in two

markets by simultaneously operating in two different markets. All class of investors are

required for a healthy functioning of the market.


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Hedgers and investors provide the economic substance to any financial market. Without

them the markets would lose their purpose and become mere tools of gambling.

Speculators provide liquidity and depth to the market. Arbitrageurs bring price uniformity

and help price discovery.

The market provides a mechanism by which diverse and scattered opinions are reflected

in one single price of the underlying. Markets help in efficient transfer of risk from

Hedgers to speculators. Hedging only makes an outcome more certain. It does not

necessarily lead to a better outcome.

What is an Option?

Options are contracts that confer on the buyer of the contract certain rights (rights to buy

or sell an asset) for a predetermined price on or before a pre-specified date. The buyer of

the option has the right but not the obligation to exercise the option.

Options come in a variety of forms. Some Option contracts, which have been

standardized, are traded on recognized exchanges. Other Option contracts exist that are

traded "over-the-counter", i.e., a market where financial institutions and corporate trade

directly with each other over the phone. Besides these, options also exist in an embedded

form in several instruments.

The popular basic instruments/variables underlying options are:

Equity Index Options, Options on individual stocks, Employee Stock Options

Interest rates Bond Options, Interest rate Futures Options, Options embedded in

bonds, caps & floors, etc

Foreign exchange Plain vanilla calls and puts, barrier Options, various kinds of

exotic Options

Others including commodities, weather, electricity, etc.


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Classification:

Option Seller - One who gives/writes the option. He has an obligation to perform,

in case option buyer desires to exercise his option.

Option Buyer - One who buys the option. He has the right to exercise the option

but no obligation.

Call Option - Option to buy.

Put Option - Option to sell.

American Option - An option, which can be exercised anytime on or before the

expiry date.

European Option - An option, which can be exercised only on expiry date.

Strike Price/ Exercise Price - Price at which the option is to be exercised. Expiration Date - Date on which the option expires.

Exercise Date - Date on which the option gets exercised by the option

holder/buyer.

Option Premium - The price paid by the option buyer to the option seller for

granting the option.

What are Call Options?

A call option gives the holder (buyer/ one who is long call), the right to buy specified

quantity of the underlying asset at the strike price on or before expiration date.

The seller (one who is short call) however, has the obligation to sell the underlying asset

if the buyer of the call option decides to exercise his option to buy.


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What are put Options?

A Put option gives the holder (buyer/ one who is long Put), the right to sell specified

quantity of the underlying asset at the strike price on or before a expiry date.

The seller of the put option (one who is short Put) however, has the obligation to buy the

underlying asset at the strike price if the buyer decides to exercise his option to sell.

What is a swap?

A swap is nothing but a barter or exchange but it plays a very important role in

international finance. A swap is the exchange of one set of cash flows for another. A

swap is a contract between two parties in which the first party promises to make apayment to the second and the second party promises to make a payment to the first. Both

payments take place on specified dates. Different formulas are used to determine what the

two sets of payments will be.


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CHAPTER 2

COMPANY PROFILE


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MERITS CAPITAL MARKET SERVICES PRIVATE

LIMITED

ABOUT MERITS:

Merits is an emerging broking house centered at New Delhi who have been riding on an

experience of almost 2 decades and operating from the present Registered Office situated

at the heart of Delhi, since 1993 .

SPECIALIZATION:

We specialize in broking activities related to Equities, Derivatives, Commodities and

Currencies and own membership of NSE-CM, NSEFO, MCX & MCX-SX.

INITIATIVE:

Weve just initiated our expansion drive with Quality Service and Innovations as our

banners. Enthused by the immense appreciations received from our existing clients and

associates about our quality services and commitment values, we have decided now to

roar out our embedded values.

Merging Innovations Emerging Services


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INNOVATIVE APPROACH:

Merits Capital has always realized the importance of being innovative in the chosen

fields and thrives on the same. We have introduced number of innovative services,

systems and strategies to meet the rapidly changing scenario and environment.

COMPLIANCE:

We have endeavored to perform strictly in accordance with the Government / SEBI

Regulations in order to safeguard the interest of each individual.

ETHICAL STANDARD:

The main focus of the company is client relationship with ethical and transparent

business practices through unbiased investment advice with the objective of achieving

sustainable superior investment returns for our clients.

MOTIVE:

The humility to accept changes and imbibe new ideas and concepts underlines the culture

at Merits Capital. And, customer satisfaction has been the only motive throughout.


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PROMOTERS:

Merits is promoted and managed by Mr. Gagandeep Singh (M.D.) along with Mr.

Dilmeet Singh (Director) who are young and energetic qualified individuals and hadthemselves set up the roots of Merits in 1993. Both belong to a well reputed family in

Delhi and are known for their undeterred commitment.

VISION:

We envision ourselves as a National company with offices reaching every business city

and town of the country spreading our inherent message of committed and qualityservices.


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PROFILE OF THE COMPANY

Name of the Company : - Merits Capital Private Limited

Year of Establishment : - 1993

Head Office :- 65,Old Rajinder Nagar Market

New Delhi-110060

Corporate Office :- FF-19,B-1/8,Apsara Arcade ,

Pusa Road, (Karol Bagh Metro Station)

New Delhi - 110005

Nature of Business Services:- Depository services, online services and

technical research

Number of employees :- 150

Revenue :- data not available

Website :- www.merits.in

Slogan :- merging innovations emerging services
http://www.merits.in/http://www.merits.in/


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PRODUCTS AND SERVICES OF

MERITS CAPITAL PRIVATE LIMITED

The different types of products and services offered by Merits Capital Pvt. Ltd. are as

follows:

Equity and derivatives trading

Depository services

Online services

Commodities trading

Dial-n-trade

Portfolio management

Share shops

Fundamental research

Technical research


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SERVICES OFFERED BY MERITS:

We have always endeavored on providing unbeaten services and have designed them in

such a way so as to provide excellent trading experience. Following is the list of services

that have helped our clients in the past and will continue to help them achieve their future

targets through our Innovative approach and Hi-Tech solutions.

Trading options in Cash, Derivatives, Commodities and Currencies

FREE Internet trading IDs

Robust online back office support

INSTANT trade confirmation through SMS

Well researched trading calls

Brokerage rate offered on your demand

Branch connectivity through latest technologies

Dedicated Relationship Managers available 24 X 7

Surveillance measures for loss protection

Excellent strategies for disciplined trading

Strategizing for amateurs in trading Numerous account reports intimated daily through SMS

Most HI-TECH automation service

Start with meagre margin amount

Market/news alerts through amplified stereo system in dealing rooms

Every 5 minutes valuation of clients portfolio

Dedicated dealers with provisioned laptops

NIFTY sound alert service FREE Birthday Surprise 50% rebate in brokerage

A lot more eyebrow raisers to comeStay connected!!!


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BUSINESS SERVICES:

Trading Opportunities: Merits Capital facilitates its clients to trade in the Cash

Market, Derivatives, Commodities and Currencies.

Work online from home/office - FREE Internet trading IDs: To enable our clients

to trade online, we provide each of our clients with trading IDs without any extra cost.*

Robust Online Back Office Support: Merits Capital provides online access to all

the necessary back office reports in detail which can be accessed by associates and clients

seamlessly.

All branches are provisioned to be connected through latest technologies

viz. MPLS / VPN / Radio Frequency / DSL / Dedicated lease lines, etc.: Merits

network of clients and branches is expanding and its necessary for everyone to be

connected at all times. Therefore, we assure you options with most reliable

connectivity for hassle-free trading.

Personalized services: To us, our clients satisfaction is the paramount and to

achieve this at every level, we employ Relationship Managers (RMs) who will be

obliged to assist you with the best, in order for you to get maximum from the

money you invest.

Meagre margin requirement: Working with Merits Capital you can open your

trading account for as low as Rs. 5000/- as a margin amount.


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INNOVATIVE SERVICES:

INNOVATIVE SERVICES (Innovations flow in the veins of Merits)

An Innovation created out of quest to service people: INSTANT trade

confirmation through SMS. Just as you trade; you get a confirmation message on

your mobile instantly and automatically.

Unique of their kind dealing rooms with amplified stereo systems for market

alerts and daily trading calls: We at Merits Capital make sincere effort for the

benefits of the clients and have provided with the appropriate infrastructure. Onesuch attempt is where we provide our clients with dealing rooms where Nifty

alerts, trading calls, news, views, etc. are notified with the help of amplified stereo

systems, thus keeping them updated with latest ongoing developments related to

markets.

Dynamic valuation of clients portfolio every minute at our website.

Nifty sound alerts service - FREE: A real useful time saver. Just login and it

generates sound alerts in two different tones depicting bullish/bearish moves at

every 7 points movement of Nifty.

Excellent client communication systems: Any actions in clients account informed

via SMS and E-Mail (email service upcoming) simultaneously. Such as:

All payments made and received.

All deliveries transferred and received to/from client.

Daily net obligation Cash Market.

Final trade confirmation F&O.

Net position carryover along with MTM profit / loss for current month F&O.

Daily debit reminder.


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Client holding of securities in our beneficiary along with valuation,

communicated weekly.

An excellent strategy: We always strive to work upon complex subjects and tend

to make those simplified for our clients. On the track, we have formulated an

intelligent strategy to exercise self-discipline in intraday trading. You can freely

ask us during interactions.

Most Hi-Tech automation service: This service has already created a strong

vacuum amongst Stock Market traders and is extremely awaited. Final testing

underway.


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SPECIAL SERVICES:

Self designed brokerage system demand your brokerage: If you own value for

us and that value justifies in our designated brokerage structure, we offer you the

said privilege of demanding your brokerage. With the challenge of providing

competitive brokerage we assure you benefits over your existing arrangements.

Dedicated Dealers: We value your esteem, hence we offer dedicated dealers to

voluminous traders who can even move along with you and carry out your trades

on their own Laptops, at your instructions.

Strict vigil on Relationship Managers (RMs) who tend to trade in clients accounts

without their knowledge: We take our clients investment most seriously and for

the protection of investors interest along with many other services that we

provide, we carry out strict check on our RMs who may misleadingly trade into

clients account without their knowledge. In case anyone is found guilty at any

point of time, strict action is taken against him/her.

Well researched trading calls: These form the backbone of quality in our

organization. We possess in-house research cell to add value for our clients. Any

trader would love to follow those.

Birthday Surprise: On the joyous occasion of your birthday we intent to surprise

you by offering very low brokerage charges slashed down to 50% only for your

special day. Happy Birthday! Happy Trading!


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WHY MERITS WHY NOT OTHER BROKING FIRMS:

1. TRUST: Trust is the only factor that has transformed many of our prospective

customers to our clients. We intend to maintain the maximum levelof transparency by taking utmost care in communicating each and every transaction

of client that takes place in our bounds.

2. STABILITY: Of Merits emerge from 1993 carrying considerable experience and

maturity thus qualifying for being a stable organization.

3. INNOVATION: We have been first in the market to introduce the dynamic mobile

service that updates each of its clients about every trade that takes place in his/her

account. We have a team of experts who are always on the look out for innovative

products and solutions that would help to support clients trading activities which is

Merits core business.

4. RISK AVERSE: Unlike many other players in the industry we have a well

communicated centralized risk management system. This allows us to offer the same

level of service to customers across all locations.

5. VALUE : Whether you are a customer with a small or large wallet size, you can

expect us to bring you value in every form.

Quality research

Quality trade execution

Low brokerages

Accounts that suit your investment profile

Risk profiler

Superior customer service


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6. SERVICE :We believe in high standards of service and thats precisely what we

offer. We have developed a strong grip over the market with the unprecedented

services we provide to our clients and make them feel privileged.

7. ROBUST TECHNOLOGY: We have developed a highly technological support

system and great utility software applications with the use of latest technologies.

These technologies have enabled us and our clients to trade better, faster and

cheaper.

CHARGE STRUCTURE

Fee structure for General Individual:

CHARGE

ACCOUNT OPENING Rs. 300/=

BROKERAGE Intra-day=0.01%

Delivery=0.10%

Annual Maintenance cost Rs. Nil in the first year , Rs. 300/= per annum to

be

Charged second year onwards


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PROCESS OF OPENING AN ACCOUNT

LEAD MANAGEMENT SYSTEM LMS / REFERENCES

CONTACT THE PERSON OVER PHONE OR THROUGH EMAIL

FIXING AN APPOINTMENT WITH THE PERSON

GIVING

DEMONST-

RATION

YES NO

DOCUMENTATION

FILLING UP THE FORM

SUBMISSION OF THE FORM

LOGIN OF THE FORM

SENDING ACCOUNT OPENING KIT TO THE CLIENT

TRADING


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Apart from two passport size photographs, one needs to provide with the following

documents in order to open an account with Merits Capital Pvt. Ltd.

Photocopy of the clients PAN Card which should be duly attached

Photo copy of any of the following documents duly attached which will serve as

correspondence address proof:

a. Passport (valid)

b. Voters ID Card

c. Ration Card

d. Driving License (valid)

e. Electricity Bill (should be latest and should be in the name of the client)

f. Telephone Bill (should be latest and should be in the name of the client)

g. Flat Maintenance Bill (should be latest and should be in the name of the

client)

h. Insurance Policy (should be latest and should be in the name of the client)

i.

Lease or Rent Agreement.

j. Saving Bank Statement** (should be latest)

Two cheques drawn in favour of Merits Capital Pvt. Ltd. One for account

opening fees and other for margin money (minimum margin money is Rs. 5000).

** A cancelled cheque should be given by the client if he provides Saving BankStatement as a proof for correspondence address.

NOTE: Only Saving Bank Account cheques are accepted for the purpose of

Opening an account.


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TRADING GUIDELINES

FOREMOST

RULES FOR TRADING

RULES FOR INVESTING

FOREMOST:

Three major decisions to be taken while entering the stock market

Do you want to trade or invest?

o The rules are absolutely different in both the themes.

What is my risk reward ratio?

o Earning rewards should be more than possible losses.

Are you timing the market well?

Timing is what all is required at the Stock Market. Masses are running after the choice of

scrips which actually does not matter much.

MOST FORBIDDEN PERCEPTIONS PREVAILING AT THE BACK OF TRADERS

MIND

"I want to be a millionaire today" or "I want to recover my loss today only".

If thought judiciously, a very small amount per day, yields massive returns at the end of

the month."I have a Bad Luck"

Luck can never work if the strategies are incorrect. Like, wrong medicine can never heal.

"Aur kitna girega Bazaar.Buy more...Dekhi jayegi."

o Then...whatever is seen is not desirable.


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RULES FOR TRADING:

NEVER trade against the tide. Just swim a bit with the flow/direction of the

Market and come out with clean profits or minimal losses.

Do not be obstinate (ziddi) with the Markets. Those are much more powerful.

Obey the Stop Loss as staunchly as your religion. It deceives some times but is an

Ultimate Savior. If the Stop Losses execute very frequently, then there is a fault in

your strategies, Correct those.

The stop loss should be very near to the trade so that our heart accepts the loss

easily when triggered. The longer the gap, more difficult would it be to book loss

(Psychological).

Have patience in profits and run away at first step of loss. Trailing stop loss can

be used to maximize the profit.

Very few people make losses because of wrong strategies. The major culprit is

absolute in-disciplined approach. Discipline is defined as:

Trade quantities should always be uniform.

Chances of profit should be higher than chances of losses in every bout.

Amount of Profit/Loss should be pre-calculated, thought-over and then enacted.

Trades without stop loss bids (Put in the system) are suicidal.

Excitement with the market movements should be well controlled.


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There is very little room for fundamentals (of Stock) while adopting the trading

approach. Only picking the momentum is required.

The scrip chosen should be liquid enough.

A normal human brain is intelligent enough to catch the momentum by just

observing. No need to hunt for any tips, it makes you dependent.Believe it.

While doing positional tradingTake it as a thumb rule Never carry your

position when in deep loss and always carry it over when in deep profit. You are

bound to get better favoring prices, the next day.

The best form of trading approach is Intra-Day which can be judged by any

means. It leaves you fresh for 18 hrs. of the day to decide the trend neutrally, next

morning.

Golden opportunities never give much time to act. Remember, Tops and bottoms

are made just for an instance. So, act fast.


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RULES FOR INVESTING:

These investing rules are formed with a symptom based approach so that it is

easiest for a layman to take decisions based on common logics. Following are fewsuch symptoms:

Long term investors only need their Broker once or twice a year at the most. You

can judge and decide whether you are/you wish to be an investor or a trader.

Start Investing in Good quality stocks when there are no noises about Stock

Markets and Stocks are the least favorite gossips in parties. Also, when everybody

is saying that stocks are the last thing to have in life. Its the right time. Then

sleep over your stocks for at least two years and wait for a boom time.

Boom time is best signified when you hear a rickshaw puller talking about stocks.

Sell majority of your stocks and wait for another recession with cash invested in

fixed return instruments.


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MARKETING STRATEGIES

The company is focused on capturing significant growth opportunities in the financial

services market and its strategy is driven by the following key principles.A) Aggressively grow the customer base:

The companys primary focus is on increasing its customer base by-

Expanding its geographic presence in new cities as well as increasing its presence

in existing cities by opening new branches and franchises.

Increasing sales force to provide personal attention and improve customer service,

including trained relationship managers operating across the country.

By cross selling our various services and wealth management solutions.

The company has a large and well distributed network of branches across India which

provides securities broking service. The company believes that this network will enable it

to offer its services with increased convenience to the customers and to expand its market

share and customer base. This extensive distribution network provides further

opportunities cross sell its products and services as it diversify into new business stream.

B) Start dealing in currencies:

The company plan to expand its operations by providing investment schemes in

currencies to its high net worth clients that offer superior margins and are complementary

to existing operations.


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C) Enforce risk management system:

The company has fully automated risk management software, which performs direct

monitoring of operational controlling parameters to minimize risks. Merits capitals risk

management team performs real time monitoring of clients positions across cash and

derivative segments. Clients are informed about their margin requirements through

multiple channels including automated sms and e-mail channels. The company employs

strict risk management standards to reduce risk and has developed robust recovery

processes.

The company has well managed control systems along with the external audit which

performs checks at regular intervals to identify and rectify discrepancies in the system.

D) Human resources:

The companys multi business context posses unique challenges to the human resource

function. The companys business is managed by a team of competent and passionate

leaders, capable of enhancing their companys standing in the competitive market. The

companys employees have a defining role significantly accelerating its growth and

transformations, thereby enhancing its position as one of the emerging stock broking

houses. The company had a structured recruitment process; the focus is on recruiting

people who have the right mindset for working at merits capital, supported by structured

training programmes and internal growth opportunities.

During the year. While even economic meltdown impacted the financial health of the

organization, the companys focus has been on unlocking the people potential and further

developing their functional, operational and behavioral competencies.

E) Internal control system:

The company has adequate system of internal control for business processes, with regard

to operations, financial reporting, compliance with applicable laws and regulations.

Regular internal audits and checks ensure that responsibilities are executed effectively.


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Major Competitors

Sharekhan

Motilal oswal

Religare securities

India infoline

India bulls

Angel brokings

Indian finance guaranty limited

Fairwealth broking agency

Edelweiss


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TAXATION CHART

CASH FUTURES OPTIONS MCX

JOBBING DELIVERY (ON

PREMIUM

SALE)

SERVICE TAX

ON BROKERAGE

10.30% 10.30% 10.30% 10.30% 10.30%

TURNOVER

CHARGES IN % +

SERVICE TAX

0.00345% 0.00345% 0.002% 0.05% 0.0025%

Rs. PER CRORE 345 345 200 5000 250

CLEANING

CHARGES IN % +

SERVICE TAX

N/A N/A 0.001% 0.05% 0.001%

Rs. PER CRORE N/A N/A 100 5000 100

STAMP DUTY IN

%

0.002% 0.01% 0.002% 0.002% 0.001%


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Rs. PER CRORE 200 1000 200 200 100

S.T.T. 0.0125% 0.0125% 0.17%

(ON

SALE)

0.17% (ON

SALE)

N/A

Rs.PER CRORE 1250 12500 1700 (ON

SALE)

1700 (ON

SALE)

N/A

S.T.T. ON

OPTION EXPIRY

%

N/A N/A N/A 0.125% N/A

Rs. Crore

N/A N/A N/A 12500 N/A


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HR policies:

Human Resource Policies of the company are based upon the belief that the success of

the company is primarily dependent on its people and that the development of the greatest

potential of each employee is good both for the employee and the business and ultimately

leads to the growth of the Organization.

In view of this basic premise, a comprehensive set of policies is laid down in the

subsequent pages of this manual. In its design and implementation, these policies will

aim at attracting retaining and motivating personnel to achieve higher goals and attain

greater opportunities for advancement in their business career.

The guiding principles of these policies are:

1) To be pro-active, fair, competitive and a leader in business.

2) To encourage and facilitate employees potential with regard to the Organizational

goals.

3) To enhance and develop potential employees career growth.

4) To offer compensation commensurate with responsibilities, performance.

5) Achievement as we believe in BEST REWARDS FOR BEST PERFORMANCE.

POLICY WITH REGARD TO HRD:

The objectives of documenting and making available these key policies are:

1) To ensure consistency in their interpretation and implementation.

2) To apply all norms on an equitable basis throughout the organization and recognize

individual contribution and enterprise.


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PERFORMANCE APPRAISAL

The appraisal policy of Merits Capital Market services Pvt. Ltd. is to discuss,

communicate and share perceptions about an individuals contribution and achievements,

so as to give the individual feedback about all that he has done till now, in order to planfor training & developmental activities for improvement and to reward the individual for

his/her performance by means of increments, promotions etc. The Appraisal is based on

Balanced Scorecard (BSC).

The balanced scorecard is a measurement and managementsystem that enables

organizations to clarify their vision and strategy and translate them into action. It

provides feedback around both the internal business processes and external outcomes in

order to continuously improve strategic performance and results. When fully deployed,

the balanced scorecard transforms strategic planning from an academic exercise into the

nerve center of an enterprise.


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SWOT Analysis:

Analysis of the company on the following parameters:

Strength

Weakness

Opportunities

Threats

Strength:

Minimum brokerage (1 paisa intra day & 8 paisa on delivery).

Delegated relationship manager for each individual client.

Online trading through ODIN software and through company website

(meritscapital.com).

No annual maintenance charges.

No custodial charges.

It does not keep any condition as to collect minimum amount of brokerage fro its

clients.

Trading via branch network, telephones and internet account i.e. both online and

offline.

Equity analysis report to support the investment decisions of its clients.

Real time online fund transfer and exposure updating facility with HDFC, ICICI,

AXIS.

It is provide investment tips to its clients via sms.


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Major problems:

Very low emphasis on marketing campaigns.

Less no. of branches as compare to competitors.

Small customer base.

No exposure to international stock market.

No exposure to BSE.

Main focuses on north Indian territory not other territories.

Achievements:

Member of NSE.

Member of MCX.

Expanded 50 franchisees.

Client base is low but clients are loyal.

Future prospects:

To increase customer base.

To become member of BSE.

To expand branches.

To give more emphasis on marketing campaigns.

To start dealing in currencies.


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CHAPTER 3

ABOUT THE PROJECT


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JOB DESCRIPTIONThe company placed me as a Summer Trainee. I have been handling the

Following responsibilities:

To sell the products of the organization.

To coordinate the team and also help them to sell the product and also help them

in field.

To generate the leads by cold calling.

To understand customers needs and advising them to make a portfolio as per

their investment.

To do sales promotion through e-mails,making cold calling and collecting

information related with remisers.

AREA ASSIGNED

I covered areas like Delhi, Gurgaon.

TARGET MARKET

Different properties dealers.

Charted accountants.

Lawyers

Travel agencies

Transport business

Businessmen

Corporate Employees etc.


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DAY TO DAY JOB DESCRIPTION

Reporting time: 9.30 AM

Fixing appointment with clients.

Visit clients place.

Demonstrate the product on Internet to the client.

Completing the formalities like filling the application form and documentation.

Cold calling.

In the last few days I even did trading on ODIN software which the company and our

clients use to sell or buy shares and it is provided free of cost to our clients.

Few commands of ODIN software are:-

F1- For buy share. (+)

F2- For sell share. (-)

F3- Shows the list of shares which are in pending status.

F4- It shows market watch.

F5- It shows market picture and it shows no. of buyers and sellers available in

market (best 5 buyers and best 5 sellers).

F6- It work same as f5.

F7- Order history filter.

F8- It shows the executed shares.

Alt+f6- It shows net position of client or user.


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CHAPTER 4

LITERATURE REVIEW


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Derivatives trading in the stock market have been a subject of enthusiasm of research in

the field of finance. Derivatives trading have two attributes on the basis of its

effectiveness. So there have often been contrary views among the researchers of what

may be the impact of derivatives trading. According to the nature of this instrument it is

argued that this could enhance the market efficiency by establishing the market. There are

many empirical findings for both there roles of derivatives trading. Here some review of

literature for both these results are presented.

Many theories have been developed about the pros and cons of the impact of derivatives

trading in the stock market. A common agreement has been found among the studies that

the introduction of derivatives products, specially the equity index futures enables traders

to transact large volumes at much lower transaction costs relative to the cash market.

A major theoretical argument for the benefit of derivatives trading is that it reduces the

volatility of the stock market. The logic is that it reduces the asymmetric information

among the investors and information reduces the speculation in the trading system. A

variety of theoretical arguments have been advanced over the years to explain why

speculative trading in general, or the existence of derivatives markets in particular, might

affect the volatility of the underlying asset market.

In recent past, the volatility of stock returns has been a major topic in finance literature.

Empirical researchers have tried to find a pattern in stock return movements or factors

determining these movements. Generally, volatility is considered as a measurement of

risk in the stock market return and a lot of discussions have taken place about the nature

of stock return volatility. Therefore, understanding factors that affect stock return

volatility is an imperative task in many ways.


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A numbers of theoretical and empirical studies have been done on the impact of the

introduction of derivatives in the stock markets on the stock return volatility. The studies

are concerned with both the developed as well as developing countries. There are two

sets of views according to the theoretical as well as empirical findings. One is of the view

that introduction of derivatives has increased the volatility and market performance,

through forwarding its speculative roles and the other view is that the introduction of

derivatives has reduced the volatility in the stock market thus increasing the stability of

the stock market.

The behaviour of volatility in the equity market in India, for the pre and post derivatives

period, has been examined using conditional variance for the period of 1999-2003 in

(Nath, 2003). He modeled conditional volatility using different method such as GARCH

(1,1). He has considered 20 stocks randomly from the Nifty and Junior Nifty basket as

well as benchmark indices itself. As result, he observed that for most of the stocks, the

volatility came down in the post-derivative trading period. All these methods suggest that

the volatility of the market as measured by benchmark indices like S&P CNX Nifty and

Nifty Junior have fallen in the post-derivatives period.

The impacts of the introduction of the derivatives contracts such as Nifty futures and

options contracts on the underlying spot market volatility have been examined using a

model that captures the heteroskedasticity in returns that is recognised as the Generalised

Auto Regressive Conditional Heteroskedasticity (GARCH) Model in Shenbagaraman

(2003). She used the daily closing prices for the period 5th Oct. 1995 to 31st Dec. 2002

for the CNX Nifty the Nifty Junior and S&P500 returns. Results indicate that derivatives

introduction has had no significant impact on spot market volatility but the nature of the

GARCH process has changed after the introduction of the futures trading.


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Both theoretical and empirical aspect of the question of how the speculation, in general,

and derivative securities in particular, effects the underlying asset markets has been

explained in Mayhew (2000). The theoretical research has revealed that there are many

different aspects of the relationship between cash and derivative markets. Although many

models predict that derivatives should have a stabilizing effect, this result normally

requires restrictive assumptions. At the end of the day, the theoretical literature gives

ambiguous predictions about the effects of derivatives markets.

Price discovery and volatility have been examined in the context of introduction of Nifty

futures at the National Stock Exchange (NSE) in June 2000 applying Cointegration and

Generalised Auto Regressive Conditional Heteroscedasticity (GARCH) techniques

respectively from January1998 to October 2002 in Raju and Karande (2003). Their

finding suggests that the introduction of futures has reduced volatility in the cash market.

The impact of trading in the Dow Jones Industrial Average index futures and futures

options on the conditional volatility of component stocks has been examined in Rahman

(2001). The conditional volatility of intraday returns for each stock before and after the

introduction of derivatives is estimated with the GARCH model. Estimated parameters of

conditional volatility in pre-futures and post-futures periods are then compared to

determine if the estimated parameters have changed significantly after the introduction of

various derivatives. The data for this study consist of transaction prices from the 30

stocks comprising the DJIA. Transaction prices for April through June 1997 (pre-futures

period) and April through June 1998 (post-futures period) are used. The results suggest

that the introduction of index futures and options on the DJIA has produced no structural

changes in the conditional volatility of component stocks. The null hypothesis of no

change in conditional volatility from pre futures to post futures periods cannot be

rejected.


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Gupta (2002) has examined the impact of index futures introduction on stock market

volatility. Further, he has also examined the relative volatility of spot market and futures

market. He has used daily price data (high, low, open and close) for BSE Sensex and

S&P CNX Nifty Index from June 1998 to June 2002. Similar data from June 9, 2000 to

March 31, 2002 have also been used for BSE Index Futures and from June 12, 2000 to

June 30, 2002 for the Nifty Index Futures. He has used four measures of volatility the

first is based upon close-to-close prices, the second is based upon open-to-open prices,

the third is Parkinsons Extreme Value Estimator, and the fourth is Garman-Klass

measure volatility (GKV). The empirical results indicate that the over-all volatility of the

underlying stock market has declined after the introduction of index futures on both the

indices.

The impact of the introduction of index futures on the volatility of stock market in India

was examined employing daily data of Sensex and Nifty CNX for period of Jan 1997-

March 2003 in Bandivadekar and Ghosh (2005). The return volatility has been modeled

using GARCH framework. They found strong relationship between information of

introduction of derivatives and return volatility. They have concluded that the

introduction of derivatives has reduced the volatility of the stock market. The same study

was done by Hetamsaria and Swain (2003). they have examined the impact of the

introduction of index futures on the volatility of stock market in India applying regression

analysis. They have used Nifty 50 index price data for the period of Jan 1998 - March

2003. They found that the volatility of the Nifty return has declined after the introduction

of index futures.

Darrat, Rahman, and Zhong (2002) have examined the impact of the introduction of

index futures on the volatility of stock market in India and causal relationship between

volume in the futures market and spot market. They have used EGARCH approach and

Granger Causality (G C) test. Their finding suggests that index futures trading may not be

blamed for the increasing volatility in the spot market. They found that volatility in the

spot market has produced volatility in the futures market.


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Board, Sandamann and Sutcliffe (2001), have tested the hypothesis that increases in the

futures market trading activity increases spot market price volatility. They used the

GARCH model and Schewert Model and found that the result does not support the

hypothesis. The data samples are taken from the U K market. Jeanneau and Micu (2003)

have explained that information based or speculative transaction also creates a link

between volatility and activity in asset and derivatives market. This link depends in part

on whether the new information is private or public and on the type of asset traded. In

theory, the arrival of new private information should be reflected in a rise in the volatility

of return and trading volumes in single equity and equity related futures and options.

The majority of studies have employed the standard ARCH or GARCH model to

examine volatility shifting. Mostly the findings are supporting the hypothesis that

introduction of derivatives has reduced the market volatility. These studies use daily

observations to estimate volatility, whereas interday data are used here. Given that

financial markets display high speeds of adjustment, studies based on longer intervals

such as daily observations may fail to capture information contained in intraday market

movements. Moreover, because of modern communications systems and improved

technology, volatility measures based on daily observations ignore critical information

concerning intraday price patterns. Andersen (1996) pointed out that the focus of the

market microstructure literature is on intraday patterns rather than interday dynamics.

This study is also based on the hypothesis that the introduction of the derivatives products

has reduced the risk inefficiency in the BSE stock market. Three derivatives products

(index futures, stock futures and index options) have been used that have been introduced

in the different time periods. The time period is also for about 8 years including the most

recent earning period as 2005-2006. Derivatives turnover also have been used for the

same return series.


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The GARCH Model

The GARCH model was developed by Bollerslev (1986) as a generalised version of

Engles (1982) Autoregressive Conditional Heteroscedasticity (ARCH). In the GARCHmodel the conditional variance at time t depends on the past values of the squared error

terms and the past conditional variances. It uses the past disturbances to model the

variance of the series and allows the variance of error term to vary over time.

Bollerslev (1986) generalized the ARCH process by allowing the conditional variance to

be a function of prior period's squared errors as well as its past conditional variance. The

advantage of a GARCH model is that it captures the tendency in financial time series data

for volatility clustering. It therefore enables us to make the connection between

information and volatility explicit, since any change in the rate of information arrival to

the market will change the volatility in the market. Thus, unless information remains

constant, which is hardly the case, volatility must be time varying, even on a daily basis.

A model with errors that follow a GARCH (1,1) process is represented as follows:

Yt = a + b1Xt + Ut ...1

ht = a + b1(Ut-1)2 + b2ht-1 ...2

Where,

ht = conditional variance (sigma square)

Ut = Error term

Equation '1' is called the conditional mean equation and equation '2' is called the

conditional variance equation. Thecoefficient of the error square termcan be viewed as a

news coefficient, with a higher value implying that recent news has a greater impact on

price changes. It can be predicted as the impact of yesterdays (the previous time period)

news on todays (present time period) price changes. The coefficient of the variance (ht-1)

reflects the impact of old news', in other words it is picking up the impact of prior news

on yesterdays variance and as such indicated the level of persistence in the information

effect on volatility.


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This estimation technique enables us to explore the link between information/news

arrival in the market and its effect on cash market volatility. Estimated parameters of

conditional volatility in pre-futures and post-futures periods are then compared to

determine if the estimated parameters have changed significantly after the introduction of

the futures.

The GARCH (1,1) framework has been extensively found to be most parsimonious

representation of conditional variance that best fits many financial time series

(Bollerslev, 1986; Bologna and Cavallo, 2002) and thus, the same has been adopted to

model stock return volatility. ARCH and GARCH models have become widespread

tools for dealing with time series heteroskedastic models. The goal of such models is to

provide a volatility measure--like a standard deviation--that can be used in financial

decision concerning risk analysis, portfolio selection and derivative pricing.

Description of Variables used in the Analysis

The variables used are as follows: NIFDR, NIFDRinf0, NIFDRinf1, NIFDRstf0,

NIFDRstf1, NIFDRopt0, NIFDRopt1, NIFDRder, INDFN, STFN, NIFJDR, S&P500DR,

INDFTO and INOPTN.

NIFDR (NSE Market Return):- This is an index of daily NSE stock market return

calculated from the NSE Nifty CNX 50, the share price index having fifty blue chip

shares companies.

NIFDRinf0:- NSE return for the period of pre index futures introduction calculated

from the daily closing price of Nifty 50.

NIFDRinf1:-NSE return for the period of post index futures introduction calculated from

the daily closing price of Nifty 50.

NIFDRstf0:- NSE return for the period of pre stock futures introduction calculated from

the daily closing price of Nifty 50.


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CHAPTER 5

RESEARCH METHODOLOGY


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RESEARCH METHODOLOGY

Methodology Specifies:-

The objectives of the study.

The method of conducting.

The tools for collection of data.

Approach of measurement and analysis of data.

To collect specific data from concerned persons through questionnaire as well as

informal decision.

Objective of the present study can be accomplished by conducting a systematic market

research. Market research is the systematic design, collection, analysis and reporting of

data and findings that are relevant to different marketing situations facing the company.

The marketing research process that will be adopted in the present study consists of the

following stages

a) Defining the problem and the research objective: The research objective states

what information is needed to solve the problem. The objective of the research is to find

out the facilities provided in mutual funds and share market and what will be its benefits

in the future.

b) Developing the research plan: Once the problem is identified, the next step is to

prepare a plan for getting the information needed for the research. The present study will

adopt the exploratory approach wherein there is a need to gather large amount of

information before making a conclusion. If required, the descriptive and casual

approaches may also be used.


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c) Collection and Sources of data: Market research requires two kinds of data, i.e.,

primary data and secondary data. Preparing questionnaires that will contain both open-

ended and close-ended questions may collect the primary data. Secondary data will be

collected from various journals, books and web sites.

d) Analyze the collected information: This involves converting raw data into useful

information. It involves tabulation of data and using statistical measures on them for

developing frequency distributions and calculating the averages and dispersions.

e) Report research findings: This phase will mark the culmination of the marketing

research effort. The report with the research findings is a formal written document. The

research findings and personal experience will be used to propose recommendations to

develop the market in online trading.

Sources of information:-Primary Sources:-

Through Questionnaire.

Face to face interview.

Secondary Sources:-

Record maintained by the company.

Internet sites likes, www.merits.in , www.google.com , www.money.rediff.com

ANALYSIS

To make our research project most effective in a given time period of two months

surveyed the information of the competitors. We undertook both Explorative as well as

Conclusive Research Design. The data has been collected from both Primary as well as

Secondary sources and we also did the fieldwork for which utmost care has been taken to

keep project unbiased from personal opinion
http://www.merits.in/http://www.google.com/http://www.money.rediff.com/http://www.money.rediff.com/http://www.google.com/http://www.merits.in/


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CHAPTER 6

DATA ANALYSIS AND FINDINGS


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Q1. Where do you invest your savings?

OPTIONS NO OF RESPONDENTS

Equity 59

Mutual fund 25

Fixed deposits 9

Insurance 7

INTERPRETATIONS:

This figure says that most people go for at 1st

EQUITY investment then for MUTUAL

FUND, FIXED DEPOSITS AND INSURANCE. Because equity gives good return in

short time as well as long term as compared to mutual fund


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Q3. Your investment decisions are influenced by

Options No of respondentsOneself 24

Broker 36

Eco policies 20

Market research 12

Friends/relatives 8

Any other

INTERPRETATIONS:

How do investors take their investment decisions is presented in this bar graph. In this graph

it is evident that mostly investment decision are taken on the insistence of the brokers firms

and companies and that percentage is 36%.

24

36

20

8

0

5

10

15

20

25

30

35

40

Percentage

Investment Decisions

Oneself

Brokers

Eco. Policies

Market Ramous

Friends/Relatives


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Q6.What are the factors which you considered before investing in

particular company?

OPTIONS NO OF RESPONDENTS

Financial potions 24

Current market position 36

Goodwill 20

Future prospects 12

Any other

INTERPRETATIONS:

What factors are necessary before the investment in company or in firm is show in this bar

graph. It is evident that in the current market position accounts for 36% , most investors go

for investment after seeing the current market positions and after that the financial position

of company which is at 24%, then goodwill of company at 20%,future prospects at 12%,and

any other factors at 8%.

24

36

20

12

8

0

5

10

15

20

25

30

35

40

factors

Percentage

Financial Positions

Current market

Positions

Goodwill

Future Prospects

Any other


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OBSERVATIONS & FINDINGS

most people go for at 1st

EQUITY investment then for MUTUAL FUND, FIXED

DEPOSITS AND INSURANCE. Because equity gives good return in short time as

well as long term as compared to mutual fund.

77% as compared to mutual fund at 23% return. It signifies mostly more people go

for share market as compared to mutual funds.

mostly investment decision are taken on the insistence of the brokers firms andcompanies and that percentage is 36%.

the satisfaction level of current investment( in share) and long term

investment(mutual fund) than here shows that the satisfaction level in current

investment (shares) is 58% and satisfaction in long term investment (mutual fund) is

42%.

the investment in company or in firm is show in this bar graph. It is evident that in the

current market position accounts for 36% , most investors go for investment after

seeing the current market positions and after that the financial position of company

which is at 24%, then goodwill of company at 20%,future prospects at 12%,and any

other factors at 8%.


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CHAPTER 7

CONCLUSIONS

(EXPERIENCE AND LEARNING)


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The monitoring and the supervision was too good they used to give me the work and after

one week the results of that work used to be checked and if any problems occur then they

used to suggest ways in order to correct that problem in future.

The responsibilities given to me were:-

Generate leads

Promote the product and services

Generate remisers

Arranging meeting with customers

Trading

The challenges which I faced were:-

Response from people were not good some people even used abusive languages

Prospects were their but could not convert them

Got irritated by failure

Achievements:-

Confidence

Improved communication skills

Immense knowledge on share market

Patience

Team work


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LEARNINGS

LEARNINGS:During my summer training, I have learned:

Importance of information technology in the field of stock broking is immense.

Stock broking companies run with the help of IT. The terminal through which the

brokers buy and sell shares is software that completely depends on the internet. For

ODIN software , this terminal has been designed by the software company Right

Query Technologies Pvt. Ltd . Buying and selling through internet is fast. As soon as

the prices of the shares goes up or comes down then they can be sold or purchased

instantly within seconds. Customer Relationship is very necessary for the company to

retain the customers.

In Merits Capital . I have learned a lot relating to the finance, learned the meaning of

the words that are mostly used in the share market.

Learned about various products of the Merits Capital , Learned various aspects

regarding Share Market.

Learned how to use online trading terminal.

Learned the various policies of the company.

Learned about various products used in the share market especially Demat accounts

and Derivatives.

Got the practical knowledge of the market.


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FINDINGS AND OBSERVATIONS:-

Fluctuations are more in secondary market than any other market.

There are more speculators than investors.

Information plays a vital role in the secondary market.

Previously rolling settlement is T+3 days, now it changed to T+4 days and further it

will be changing to T+5 days.

It was also observed that many broking houses offering internet trading allow clients

to use their conventional system as well just ensure that they do not loose them and

this instead of offering e-broking services they becomes service providers.

The number of players is increasing at a steady rate and today there are over a

dozen of brokerage houses who have opted to offer net trading to their customers

and prominent among them are SHARE KHAN, India bulls, kotakstreet, ICICI direct.


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CONCLUSION

The Indian stock market witnesses both the good as well as the bad time. Most of the people

keep them away from bad times that lead to low liquidity in the markets. But for the rest whowant to remain in the markets without loosing much of their capital and take leverage of the

market movements in both north and south directions, Derivatives Instruments are the tools

to be with.

By studying and applying various Derivative Instruments like Futures, Forwards and Option

strategies, I came to a conclusion that these instruments are the best ones to turn the bad time

into a good one i.e. to earn profits in any market direction.

Therefore, Derivative Instruments are a very good tool that will help us to minimize our risk

and maximize our returns so that one can have conviction in his portfolio in the hugely

volatile stock market

Finally, the objective of the study is accomplished and I recommend that one should use the

Derivative Instruments, as it is very much applicable in the Indian Stock Market.

Things have changed for the better with the Merits Capital going on-line coupled with

endeavor to stream line the whole trading system, things have changed dramatically over the

last 3 to 4 years. New and advanced technologies have breached geographical and cultural

barriers, and have brought the countrywide market to doorstep.

The introduction of on-line trading would influence the investors resulting in an

increase in the business of the exchange. It has helped the brokers handling a vast amount oftransactions and this can be an efficient trading, delivering, settlement system with adequate

protection to investors. The trading of Merits Capital of the first day was Rs. 50 lakhs.

Due to invention of online trading there has been greater benefit to the investors

as they could sell / buy shares as and when required and that to with online trading.


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The brokers has a greater scope than compared to the earlier times because of

invention of online trading.

The concept of business has changed today, this is a service oriented industry

hence the survival would require them to provide the best possible service to the

clients.


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CHAPTER 8

RECOMMENDATIONS


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RECOMMENDATIONS

I recommend the exchange authorities to take steps to educate Investors about

their rights and duties. I suggest to the exchange authorities to increase the

investors confidences.

I recommend the exchange authorities to be vigilant to curb wide fluctuations of

prices.

The speculative pressures are responsible for the wide changes in the price, not

attracting the genuine investors to the greater extent towards the market.

Genuine investors are not at all interested in the speculative gain as their

investment is based on the future profits, therefore the authorities of the exchange

should be more vigilant to curb the speculation.

The company needs to work on its marketing department in order to attract more

number of clients under their name and they are capable of doing this but for that

they seriously need to work hard in marketing department.

Company should find new marketing people who will only do marketing and the

RMs (relationship manager) role should be only confined with dealing to their

customers queries and trading on behalf of their clients. If the role gets clashed

then there may exist problems which would affect the company and would bring

down the morale of its staff. So a proper marketing department should be set up.

Company should try and retain their old staff because these were the people who

stood by the company in their hard times so efforts should be made to retain the

old n experienced staff.

Branches of the company are basically situated in central delhi , so many people

merits capital

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