SECURITY TRADING PRACTICES

Module I
Investment Environment, Markets and Instruments
FINANCIAL SYSTEM
• A financial system refers to the complex network of institutions, markets,
instruments, services, and regulatory bodies that facilitate the flow of money
between borrowers, investors, and lenders.
• It ensures efficient allocation of resources, promotes savings and investments,
provides liquidity, and supports the economic growth of a country.
COMPONENTS OF A FINANCIAL SYSTEM
• Financial Institutions: Intermediaries that connect savers and borrowers and offer
various financial products. Examples: Banks, Insurance Companies, Mutual
Funds, NonBanking Financial Companies (NBFCs).
• Financial Markets: Platforms where financial instruments like shares, bonds, and
commodities are traded.
• Financial Instruments: These are contracts that represent an asset or liability.
Examples: Shares, Bonds, Debentures, Treasury Bills, Futures, Options.
• Financial Services: Services that facilitate transactions and provide support for
the financial system. Examples: Banking, Insurance, Asset Management,
Investment Advisory Services.
• Regulatory Bodies: These institutions ensure that the financial system remains
transparent and stable. Examples: RBI, SEBI
FUNCTIONS OF A FINANCIAL SYSTEM
Mobilization of Savings
Allocation of Capital
Facilitating Investment and Growth
Providing Liquidity
Risk Management
Facilitates Payments and Settlements
Promotes Economic Development
FINANCIAL MARKET
A financial market is a marketplace where buyers and sellers engage in the trading of
financial assets such as stocks, bonds, currencies, and derivatives. These markets are
crucial for the functioning of the economy, facilitating the transfer of funds from savers
to borrowers and providing liquidity and price discovery for financial instruments.
TYPES OF FINANCIAL MARKETS
1. Capital Markets
o Definition: Markets for longterm debt and equity securities.
o Subtypes:
▪ Primary Market: Where new securities are issued and sold for the
first time (e.g., IPOs).
▪ Secondary Market: Where existing securities are traded among
investors (e.g., stock exchanges).
2. Money Markets
o Definition: Markets for shortterm borrowing and lending, typically
involving instruments with maturities of one year or less.
o Instruments: Treasury bills, commercial paper, certificates of deposit
(CDs), and repurchase agreements.
3. Foreign Exchange Markets (Forex)
o Definition: Markets for trading currencies. It is decentralized and operates
24/7.
o Purpose: Facilitates international trade and investment by allowing
currency conversion.
4. Derivatives Markets
o Definition: Markets for financial instruments whose value is derived from
the value of underlying assets.
o Instruments: Futures, options, swaps, and forward contracts.
5. Commodities Markets
o Definition: Markets for buying and selling raw or primary products.
o Types: Agricultural commodities (e.g., wheat, coffee), metals (e.g., gold,
silver), and energy (e.g., oil, natural gas).
FUNCTIONS OF FINANCIAL MARKETS
1. Price Discovery: Financial markets help determine the prices of financial
instruments through supply and demand dynamics, reflecting the value of
securities.
2. Liquidity: They provide a platform for buying and selling securities, allowing
investors to convert assets into cash quickly without significant loss of value.
 3. Risk Management: Markets enable participants to hedge against risks associated
with price fluctuations through derivatives like options and futures.
4. Capital Formation: They facilitate the raising of capital for businesses by
allowing them to issue stocks and bonds, thus promoting investment and growth.
5. Efficient Resource Allocation: Financial markets channel funds from savers to
those who can invest them most productively, optimizing resource allocation in
the economy.
6. Transparency: Regulations and standardized reporting in financial markets
enhance transparency, making it easier for investors to assess risks and returns.
KEY PARTICIPANTS IN FINANCIAL MARKETS
1. Investors: Individuals or institutions that invest in securities with the expectation
of earning returns. Types include retail investors, institutional investors (pension
funds, mutual funds), and foreign institutional investors (FIIs).
2. Issuers: Entities (governments, corporations) that issue securities to raise capital.
3. Intermediaries: Financial institutions (e.g., banks, brokerages) that facilitate
transactions between buyers and sellers, providing liquidity and expertise.
4. Regulatory Bodies: Government agencies that oversee and regulate financial
markets to ensure fairness, transparency, and integrity. Examples include SEBI
(Securities and Exchange Board of India), the SEC (Securities and Exchange
Commission) in the USA, and the FCA (Financial Conduct Authority) in the UK.
5. Market Makers: Entities that provide liquidity by being willing to buy and sell
securities at any time, thus facilitating smooth trading operations.
MAJOR FINANCIAL MARKETS
1. Stock Market: A segment of the financial market where shares of publicly traded
companies are bought and sold. Major stock exchanges include the Bombay
Stock Exchange (BSE) and National Stock Exchange (NSE) in India, as well as
the New York Stock Exchange (NYSE) and NASDAQ in the USA.
2. Bond Market: A market where participants can issue new debt or buy and sell
existing bonds. Government and corporate bonds are commonly traded here.
3. Forex Market: The largest and most liquid financial market in the world,
facilitating the exchange of currencies. Major currency pairs traded include
USD/EUR, USD/JPY, and GBP/USD.
4. Commodity Market: Platforms for buying and selling physical goods, such as
metals, oil, and agricultural products. This includes exchanges like the Chicago
Mercantile Exchange (CME).
5. Derivatives Market: Where futures and options contracts are traded. Participants
use derivatives to hedge risks or speculate on price movements.
 PRIMARY MARKET AND SECONDARY MARKET
Financial markets can be classified based on various criteria, including the type of
instruments traded, the maturity of the instruments, and the purpose of the market.
Primary Market
The primary market refers to the segment of the financial market where new
securities—such as stocks, bonds, and other instruments—are issued for the first time.
This is the market where companies, governments, or other entities raise capital by
selling newly issued securities directly to investors. The funds raised are used for
various purposes, including business expansion, debt repayment, or new projects.
Features of the Primary Market:
• Direct Fund Raising: Companies or issuers receive money directly from
investors by issuing new securities.
• First Time Issuance: Securities are issued for the first time, making them “fresh
issues.”
• No Trading: Securities are not traded in this market; they are issued. Once
purchased, investors may trade them in the secondary market.
• Facilitates Capital Formation: It helps companies raise funds for expansion and
development.
Types of Issues in the Primary Market:
1. Initial Public Offering (IPO): When a company offers its shares to the public for the
first time.
• Example: A startup deciding to list its shares on a stock exchange for the first
time.
2. Follow on Public Offering (FPO): When a listed company issues additional shares
to raise more funds.
• Example: A company already listed on the exchange raising more capital through
new shares.
3. Private Placement: Securities are sold to a select group of investors (like
institutional investors) rather than the general public.
4. Rights Issue: Existing shareholders are given the right to purchase additional shares
at a discounted price, in proportion to their existing holdings.
5. Preferential Allotment: Securities are issued to a specific group of investors at a
predetermined price, often used to raise funds quickly.
Participants in the Primary Market:
• Issuers: Companies, governments, or organizations raising funds.
• Investors: Retail investors, institutional investors, or highnetworth individuals.
• Underwriters: Investment banks or financial institutions that help issuers sell
securities to the public.
• Regulators: Authorities like SEBI (Securities and Exchange Board of India) that
regulate and ensure transparency in the issuance process.
Advantages of the Primary Market:
• Helps companies raise longterm capital.
• Allows investors to access shares at their initial offer price.
• Promotes economic growth by providing funds for projects and businesses.
The primary market plays a crucial role in the economy by mobilizing savings into
productive investments, fostering business growth, and facilitating infrastructure
development.

Secondary Market
The Secondary Market is where previously issued securities are bought and sold
among investors. It provides liquidity to investors and reflects the true market value of
securities. The stock exchanges (like the BSE and NSE in India) and over-the-counter
(OTC) markets facilitate these transactions.
Features of the Secondary Market
• Trading of Existing Securities: Investors trade securities that were initially
issued in the primary market.
• Liquidity: It provides a platform for investors to buy and sell securities, ensuring
liquidity and price discovery.
• Market-Driven Prices: Security prices fluctuate based on supply, demand, and
market sentiment.
• Intermediaries Involved: Brokers and dealers facilitate transactions between
buyers and sellers.
• Regulated by SEBI: In India, the Securities and Exchange Board of India (SEBI)
regulates secondary market activities.
Instruments Traded in the Secondary Market
1. Equity Shares: Common and preferred shares of companies.
2. Debt Instruments: Bonds, debentures, and government securities.
3. Derivatives: Futures, options, swaps, and forwards.
4. Mutual Funds and ETFs: Units of mutual funds and exchange-traded funds.
 5. Forex Instruments: Currencies traded in the foreign exchange market.
Difference Between Primary and Secondary Market
Aspect Primary Market Secondary Market
Purpose Issuance of new securities. Trading of existing securities.
Issuer Company raises funds by Company is not directly involved;
Involvement issuing securities. trading occurs between investors.
Capital Helps companies raise new No new capital raised; investors
Generation capital. exchange ownership.
Price Securities are issued at a Prices are determined by market
Determination fixed price or through forces.
book-building.
Intermediaries Investment banks and Brokers, dealers, and stock
underwriters. exchanges.
Risk Investors take risks by Lower risk as securities already
purchasing new issues have a track record in the market.
without prior market data.
Market Type New Issue Market (NIM). Stock Exchange and OTC
Markets.
Examples IPO, FPO, Rights Issue. BSE, NSE, Forex Market.

INSTRUMENTS OF SECONDARY MARKET

The secondary market is the financial market where existing securities such as stocks,
bonds, and derivatives are bought and sold among investors. Unlike the primary market,
where new securities are issued directly by companies, the secondary market facilitates
the trading of previously issued securities. It provides liquidity to investors, enabling
them to sell their holdings or buy more securities from others.
1. Equity Instruments: It refer to financial instruments that represent ownership in a
company or corporation. These instruments give investors a claim on the company’s
assets and earnings.
• Common Shares: Common shares represent ownership in a company, giving
shareholders voting rights and dividends. Prices fluctuate based on market
conditions and company performance. Shareholders may also benefit from capital
gains when they sell shares at a higher price than the purchase price, reflecting
the company's growth.
• Preferred Shares: Preferred shares offer fixed dividends and priority over
common shares during liquidation but typically lack voting rights. Some
preferred shares come with convertible features, allowing shareholders to convert
them into common shares under certain conditions, providing potential for capital
appreciation.
2. Debt Instruments: Debt Instruments are financial securities that represent borrowed
money that must be repaid, typically with interest, at a future date. When an entity (such
as a corporation or government) issues a debt instrument, it is essentially borrowing
funds from investors, who in return receive regular interest payments and the return of
principal at maturity.
• Government Bonds: Issued by governments to raise funds, providing lowrisk
fixed income. In India, government bonds can be used as collateral for loans,
enhancing liquidity for bondholders.
• Corporate Bonds: Issued by companies, offering higher returns but with greater
risk than government bonds. Corporate bonds are rated by credit agencies,
providing investors with insights into the creditworthiness of the issuing
company.
• Municipal Bonds: Issued by local authorities for public projects, often
providing tax benefits. In India, municipal bonds can be issued to finance urban
infrastructure projects, such as water supply and transportation.
• Debentures: Unsecured debt instruments backed only by the creditworthiness of
the issuer. Debentures can be convertible or nonconvertible; convertible
debentures allow holders to convert them into equity shares after a specific
period.
• Treasury Bills (T Bills): Short-term government debt instruments with
maturities of less than one year. T Bills are issued at a discount to face value, and
the difference is the investor's return upon maturity.
• Certificates of Deposit (CDs): Issued by banks with fixed interest rates and
maturity periods, offering low risk returns. CDs can be negotiated in the
secondary market, providing liquidity before maturity for investors needing
access to funds.
• Commercial Papers (CPs): Short term unsecured promissory notes issued by
companies to meet working capital needs. CPs have maturities ranging from a
few days to a year, making them a flexible financing option for corporations.
3. Derivative Instruments : Derivative Instruments are financial contracts whose
value is derived from the performance of an underlying asset, index, or rate. Derivatives
can be complex and carry significant risk, but they also offer opportunities for profit in
various market conditions.
• Futures Contracts: Futures are standardized contracts to buy or sell a specified
quantity of an underlying asset (such as commodities, currencies, or financial
instruments) at a predetermined price on a specified future date. Futures are
traded on exchanges (e.g., the National Commodity and Derivatives Exchange in
India) and are used for hedging against price fluctuations or speculating on price
movements.
• Options Contracts: Options give the holder the right, but not the obligation, to
buy (call option) or sell (put option) an underlying asset at a predetermined price
within a specified time frame. Options can be traded on exchanges or over-the-
counter (OTC). They allow for strategic flexibility, enabling investors to manage
risk or speculate based on market outlook.
 • Forwards Contracts: Forwards are customized agreements between two parties
to buy or sell an asset at a specified price on a future date. Unlike futures,
forwards are not standardized or traded on exchanges, making them more flexible
but also riskier due to counterparty risk. Forwards are commonly used in
commodity and foreign exchange markets to lock in prices for future transactions.
• Swaps: Swaps are contracts in which two parties agree to exchange cash flows
based on different financial instruments. The most common types are interest rate
swaps (exchanging fixed-rate payments for floating-rate payments) and currency
swaps (exchanging cash flows in different currencies). Swaps are used for
hedging interest rate risk or currency risk and can be tailored to the needs of the
parties involved.
• Warrants: Warrants are long-term options issued by a company, giving the holder
the right to purchase its shares at a specified price (exercise price) within a
specific time period. Warrants are often attached to bonds or preferred stock as a
sweetener to enhance their attractiveness to investors.
4. Mutual Funds and Exchange Traded Funds (ETFs): Mutual Funds and
Exchange-Traded Funds (ETFs) are both investment vehicles that pool money from
multiple investors to invest in a diversified portfolio of assets, such as stocks, bonds, or
other securities. While they share some similarities, they also have distinct
characteristics that make each suitable for different types of investors.
• Equity Mutual Funds: Invest primarily in stocks, offering diversification.
Equity mutual funds are actively managed by professional fund managers who
aim to outperform the market through strategic stock selection.
• Debt Mutual Funds: Focus on fixed income securities like bonds and T bills.
These funds provide investors with regular income and are generally less volatile
than equity funds, making them suitable for conservative investors.
• Index Funds: Track the performance of specific indices, such as the S&P 500.
Index funds typically have lower expense ratios compared to actively managed
funds due to their passive management style.
• Exchange Traded Funds (ETFs): Trade on stock exchanges like individual
stocks, offering real-time liquidity and tracking indices or sectors. ETFs often
have tax advantages over mutual funds due to their unique structure, leading to
fewer capital gains distributions.
5. Money Market Instruments: Money Market Instruments are short-term financial
securities that provide a way for governments, financial institutions, and corporations to
manage their short-term funding needs. These instruments typically have maturities of
one year or less and are characterized by high liquidity and low risk. The money market
is crucial for maintaining liquidity in the financial system and helps ensure that cash
flows smoothly among participants.
• Treasury Bills (T Bills): Short-term government securities with maturities of up
to one year. T Bills are considered risk-free investments, making them a
preferred choice for conservative investors.
 • Commercial Papers (CPs): Unsecured, short term corporate debt instruments
used to finance operations. The commercial paper market provides flexibility for
companies to manage short term funding needs quickly.
• Certificates of Deposit (CDs): Issued by banks with fixed terms and interest
rates. CDs can be issued in various denominations, catering to both retail and
institutional investors.
• Repurchase Agreements (Repos): Short term borrowing agreements where
securities are sold and later repurchased at a higher price. Repos are widely used
by financial institutions for managing liquidity and funding day to day operations.
6. Foreign Exchange Instruments: Foreign Exchange Instruments refer to various
financial instruments used in the foreign exchange (Forex) market, where currencies are
bought and sold. These instruments facilitate international trade, investment, and the
management of currency risk, allowing individuals, businesses, and financial
institutions to engage in currency transactions. The Forex market is the largest financial
market globally, operating 24 hours a day and involving a vast array of participants.
• Forex Spot Contracts: Immediate exchange of currencies at current exchange
rates. Spot contracts are crucial for businesses engaged in international trade,
allowing them to settle transactions promptly.
• Forex Forwards: Agreements to exchange currencies at a specified rate on a
future date. These contracts help businesses manage currency exposure when they
have receivables or payables in foreign currencies.
• Currency Swaps: Agreements between two parties to exchange currency flows
for a set period. Currency swaps are often used by corporations to hedge foreign
exchange risk associated with international operations.
• Currency Futures and Options: Derivative instruments used to hedge or
speculate on currency movements. These instruments provide a structured way to
manage currency risks, particularly for investors and companies operating
globally.
7. Structured Financial Products: Structured Financial Products are pre-packaged
investment strategies based on a single security or a basket of various assets. These
products are designed to meet specific investor needs that cannot be met with standard
financial instruments. They often involve derivatives, such as options or swaps, and are
tailored to provide investors with tailored risk and return profiles, taking into account
their investment goals, risk tolerance, and market conditions.
• MortgageBacked Securities (MBS): MBS are asset-backed securities backed
by a pool of mortgage loans. Investors receive payments based on the cash flows
generated from the underlying mortgages. Commonly used in real estate
financing, providing liquidity to mortgage lenders while offering investors a way
to invest in real estate markets.
• Collateralized Debt Obligations (CDOs): CDOs are structured financial
products backed by a pool of debt instruments, such as loans or bonds. They are
divided into tranches with varying risk and return profiles. Used by investors
 seeking exposure to different levels of credit risk and to generate income from the
cash flows of the underlying assets.
• Asset-Backed Securities (ABS): ABS are securities backed by a pool of
financial assets other than mortgages, such as credit card receivables, auto loans,
or student loans. Investors receive payments based on the cash flows from these
assets. Provide an investment option that is less correlated with traditional equity
and fixed-income markets, allowing for diversification.

MAJOR AGENCIES OF SECONDARY MARKET

1. National Stock Exchange (NSE): Established in 1992, the NSE is one of the leading
stock exchanges in India. It was the first exchange in India to provide a modern, fully
automated electronic trading system.
• Functions:
o Facilitates trading in equity shares, derivatives, and debt instruments.
o Provides a platform for price discovery and efficient trading.
o Offers various indices, including the Nifty 50, which represents the top 50
companies in the Indian market.
• Innovations: Introduced several trading instruments such as options and futures,
enhancing market liquidity and depth.
2. Bombay Stock Exchange (BSE): Founded in 1875, BSE is Asia's oldest stock
exchange and the first to be recognized by the Government of India.
• Functions:
o Facilitates trading in various securities, including equities, derivatives, and
mutual funds.
o Known for the Sensex, a benchmark index that tracks the performance of
30 large companies listed on the exchange.
• Significance: BSE plays a crucial role in the Indian capital market and serves as a
barometer for the Indian economy.
3. Central Depository Services Limited (CDSL): Established in 1999, CDSL is one of
the two depositories in India, the other being NSDL. It provides services related to the
holding and transfer of securities in electronic form.
• Functions:
o Facilitates the dematerialization of securities, allowing investors to hold
shares in an electronic format.
o Provides various services such as account maintenance, settlement of
trades, and facilitating corporate actions (like dividends and bonuses).
 • Importance: CDSL enhances the efficiency and security of securities
transactions, contributing to investor confidence.
4. National Securities Depository Limited (NSDL): Founded in 1996, NSDL was the
first depository in India. It provides similar services to CDSL but has a larger market
share.
• Functions:
o Manages the dematerialization and maintenance of securities accounts.
o Facilitates trading and settlement of securities in a seamless manner.
• Role: NSDL plays a vital role in the Indian capital market, improving the
efficiency of the settlement process and reducing risks associated with physical
securities.
5. Securities and Exchange Board of India (SEBI): The Securities and Exchange
Board of India (SEBI) is the regulatory authority for the securities market in India. It
was established in 1988 as a nonstatutory body and was given statutory powers through
the SEBI Act, 1992. SEBI's primary goal is to protect the interests of investors in
securities, promote the development of the securities market, and regulate the securities
market.
Functions:
o Regulates the stock exchanges and protects the interests of investors.
o Ensures fair practices, transparency, and integrity in the securities market.
o Oversees the functioning of various market participants, including brokers,
subbrokers, and portfolio managers.
• Significance: SEBI's role is critical in maintaining investor confidence,
facilitating the growth of the securities market, and enforcing compliance with
regulations.
Agency Year Functions Key Contributions
Established
NSE 1992 Electronic trading, Nifty 50 index, modern
derivatives, price discovery trading practices
BSE 1875 Trading in securities, Sensex Asia's oldest stock exchange,
index price index
CDSL 1999 Dematerialization, securities Enhances trading efficiency
maintenance and security
NSDL 1996 Securities account Largest market share in
management, trade depository services
facilitation
 SEBI 1988 Market regulation, investor Ensures market integrity and
(Statutory protection transparency
in 1992)

These agencies play a crucial role in the functioning of the secondary market, ensuring
liquidity, efficiency, and investor protection. They collectively contribute to a robust and
dynamic securities market in India, fostering economic growth and stability. If you need
more information or details about any specific agency, feel free to ask!

SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)

The Securities and Exchange Board of India (SEBI) is the regulatory authority for
the securities market in India. It was established in 1988 as a non statutory body and
was given statutory powers through the SEBI Act, 1992. SEBI's primary goal is to
protect the interests of investors in securities, promote the development of the securities
market, and regulate the securities market.
Objectives of SEBI
1. Investor Protection: To protect the interests of investors and ensure their safety
in the securities market.
2. Market Development: To promote the development of the securities market,
enhancing its efficiency and transparency.
3. Regulation: To regulate the securities market to prevent malpractices and
promote fair trading practices.
Functions of SEBI
SEBI performs various functions, which can be broadly categorized into three major
areas:
1. Regulatory Functions:
o Regulation of Stock Exchanges: SEBI supervises and regulates stock
exchanges to ensure fair trading practices and transparency.
o Registration of Market Intermediaries: It registers and regulates
intermediaries such as stockbrokers, merchant bankers, portfolio managers,
and investment advisers.
o Inspection and Audit: SEBI conducts inspections and audits of stock
exchanges, brokers, and other market participants to ensure compliance
with regulations.
2. Protective Functions:
o Investor Education: SEBI conducts investor awareness programs to
educate the public about the securities market and investment practices.
 o Redressal of Investor Grievances: It has established mechanisms for
addressing investor complaints and grievances against market
intermediaries.
o Monitoring Corporate Governance: SEBI enforces guidelines for
corporate governance to protect shareholders' rights and interests.
3. Developmental Functions:
o Market Development Initiatives: SEBI promotes the development of new
financial products and instruments, enhancing market depth and liquidity.
o Regulating Mutual Funds and Collective Investment Schemes: It
regulates mutual funds and collective investment schemes to ensure
transparency and protect investors' interests.
o Promoting Research and Development: SEBI encourages research and
development activities in the financial market to enhance market efficiency.
Key Regulations and Guidelines by SEBI
• Securities and Exchange Board of India (Issue of Capital and Disclosure
Requirements) Regulations, 2018: These regulations govern the process for the
issuance of securities by companies.
• Securities and Exchange Board of India (Prohibition of Insider Trading)
Regulations, 2015: This regulation aims to prevent insider trading by prohibiting
trading based on unpublished pricesensitive information.
• Securities and Exchange Board of India (Listing Obligations and Disclosure
Requirements) Regulations, 2015: These guidelines set the requirements for
listed companies regarding disclosure and corporate governance.
SEBI's Organizational Structure
• Board of SEBI: SEBI is governed by a board consisting of a Chairman and
several other members, including representatives from the Ministry of Finance,
Reserve Bank of India (RBI), and other stakeholders.
• Regional Offices: SEBI has several regional offices across India to facilitate its
operations and enhance its outreach.
Importance of SEBI
• Market Integrity: SEBI plays a vital role in maintaining the integrity of the
securities market, thereby boosting investor confidence.
• Regulatory Framework: It provides a robust regulatory framework that governs
market participants, ensuring a level playing field for all investors.
• Economic Growth: By promoting a healthy securities market, SEBI contributes
to the overall economic growth and stability of the Indian economy.
SEBI is a crucial institution in the Indian financial system, fostering transparency,
investor protection, and the orderly functioning of the securities market. Its efforts have
significantly enhanced the confidence of investors and the overall development of the
Indian capital market.

DIFFERENT TYPES OF TRADING

Trading refers to the buying and selling of financial instruments like stocks, bonds,
commodities, or currencies. Depending on strategies, time frames, and objectives,
traders use various approaches. Below are the key types of trading practiced in financial
markets, especially in the Indian context:
1. Intraday Trading: Intraday trading, also known as day trading, involves buying and
selling securities within the same trading day. The goal is to capitalize on small price
movements throughout the day.
Key Features:
• No overnight holding of positions.
• High volatility and quick decisions are crucial.
• Common in stock, currency, and commodity markets.
Example: Buying a stock at ₹100 in the morning and selling it at ₹105 by the
afternoon.
2. Swing Trading: Swing trading involves holding positions for a few days to a few
weeks, aiming to profit from short- to medium-term market movements. Traders
analyze price patterns and market trends to predict swings in prices.
Key Features:
• Positions are held for several days or weeks.
• Technical analysis is commonly used to predict trends.
Example: A trader might buy shares of a company during an upward trend and sell them
after a week when the stock appreciates by 10%.
3. Positional Trading: Positional trading involves holding positions for several weeks
to months, or even years, with the aim of benefiting from long-term trends. It is similar
to investing but more focused on market timing.
Key Features:
4. Requires patience and strategic analysis of market trends.
5. Not influenced by daily market fluctuations.
Example: Buying shares during a market correction and holding them until prices rise
significantly over the next six months.
4. Scalping: Scalping is a high-frequency trading strategy where traders aim to make
small profits from multiple trades throughout the day. Traders look for tiny price
changes in liquid markets.
Key Features:
• Trades last for seconds or minutes.
• High volume of trades with minimal profit per trade.
Example: A trader might buy and sell the same stock multiple times in a day, profiting
₹1-2 per trade.
5. High-Frequency Trading (HFT): HFT involves algorithmic trading using powerful
computers to execute a large number of trades within milliseconds. This type of trading
is used by financial institutions and hedge funds.
Key Features:
• Relies on algorithms and high-speed data.
• Not accessible to retail traders due to infrastructure costs.
Example: Institutions use algorithms to quickly trade stocks when a specific technical
indicator is triggered.
6. Algorithmic Trading: Also known as Algo Trading, this type of trading uses
automated systems to execute trades based on pre-programmed instructions. These
algorithms consider factors like price, time, and volume to decide trades.
Key Features:
• Eliminates emotional bias in trading.
• Used extensively in stock, forex, and commodity markets.
Example: An algorithm buys stocks automatically when a stock index drops by 5%
within a specific time.
7. Delivery Trading: In delivery trading, traders buy and hold stocks for the long term
by taking delivery of the securities. The intention is usually to invest for capital
appreciation over months or years.
Key Features:
• No margin or leverage is used; full payment is required.
• Traders become shareholders and can benefit from dividends.
Example: Buying shares of a blue-chip company and holding them for several years.
8. Options Trading: Options trading involves buying and selling options contracts,
giving the holder the right (but not the obligation) to buy or sell an asset at a specified
price before a certain date.
Key Features:
• Provides leverage and limits downside risk.
• Types include call options (right to buy) and put options (right to sell).
Example: Buying a call option on a stock, anticipating the stock price will rise.
9. Futures Trading: Futures trading involves contract-based trading where traders
agree to buy or sell an asset at a specified future date and price.
Key Features:
• Contracts are standardized and traded on exchanges.
• Used for both hedging and speculation.
Example: A trader buys a crude oil futures contract anticipating prices will rise in the
coming months.
10. Commodity Trading: Commodity trading involves buying and selling raw
materials like gold, silver, crude oil, or agricultural products. Trading can occur in both
spot markets (immediate delivery) or futures markets (delivery at a future date).
Key Features:
• Commodity markets are sensitive to global events and economic data.
• Requires knowledge of supply-demand dynamics.
Example: A trader buys gold futures, expecting geopolitical tensions to increase
demand.
11. Forex (Foreign Exchange) Trading: Forex trading involves trading currencies in
the global currency market. Traders profit from fluctuations in exchange rates between
currency pairs.
Key Features:
• The forex market is the largest and most liquid market in the world.
• Commonly traded pairs include USD/INR, EUR/USD, and GBP/USD.
Example: A trader buys USD/INR, expecting the Indian Rupee to weaken against the
US Dollar.
12. Margin Trading: Margin trading allows traders to borrow funds from brokers to
buy securities, amplifying both profits and losses. It involves trading with leverage,
meaning only a fraction of the total value of securities needs to be paid upfront.
Key Features:
• Higher risk due to leverage.
• Traders must maintain a margin balance to cover potential losses.
Example: A trader uses ₹1 lakh as margin to buy securities worth ₹5 lakh, expecting a
small rise in prices.
13. Arbitrage Trading: Arbitrage trading involves simultaneously buying and selling
the same security in different markets to profit from price differences. It is a risk-free
strategy that takes advantage of inefficiencies in the market.
Key Features:
• Requires quick execution to benefit from price differences.
 • Often used by institutions using high-frequency trading.
Example: Buying a stock on the NSE at ₹1,000 and selling it on the BSE at ₹1,005,
pocketing the difference.
Different types of trading offer varied opportunities depending on the trader's risk
appetite, time commitment, and market expertise. While day traders thrive on quick
profits from intraday moves, long-term investors prefer delivery trading or positional
trading. With advancements in technology, algorithmic trading and high-frequency
trading have also gained prominence, especially in developed markets and large
institutions.

DERIVATIVE MARKET
The derivative market is a financial market where instruments known as derivatives
are traded. Derivatives derive their value from an underlying asset, index, or rate. They
can be used for various purposes, including hedging, speculation, and arbitrage.
Key Features of Derivatives
1. Underlying Asset: Derivatives are based on underlying assets such as stocks,
bonds, commodities, currencies, interest rates, or market indices.
2. Leverage: Derivatives allow traders to control a large amount of an underlying
asset with a relatively small investment, providing potential for high returns (and
high risks).
3. Hedging: They can be used to protect against price fluctuations in the underlying
asset, reducing the risk of loss.
4. Speculation: Traders can speculate on the future price movements of the
underlying assets without actually owning them.
Types of Derivatives
1. Futures Contracts: A futures contract is a standardized agreement to buy or sell
an underlying asset at a predetermined price on a specified future date.
2. Options Contracts: An options contract gives the holder the right (but not the
obligation) to buy or sell an underlying asset at a specified price before a certain
date…. Types:
▪ Call Option: Grants the right to buy the underlying asset.
▪ Put Option: Grants the right to sell the underlying asset.
3. Swaps: Swaps are agreements between two parties to exchange cash flows based
on different financial instruments…. Types:
▪ Interest Rate Swaps: Involves exchanging fixed interest rate
payments for floating rate payments.
 ▪ Currency Swaps: Involves exchanging principal and interest
payments in one currency for another.
4. Forwards: A forward contract is a customized agreement between two parties to
buy or sell an asset at a specified future date for a price agreed upon today.
Derivative Market Participants
1. Hedgers: Market participants who use derivatives to reduce risk exposure in their
investments. For example, a farmer may hedge against falling crop prices by
selling futures contracts.
2. Speculators: Traders who seek to profit from price changes in derivatives
without the intention of holding the underlying asset. They take on risk in hopes
of making gains.
3. Arbitrageurs: Traders who exploit price differences between markets to earn risk
free profits. They may buy a derivative in one market and sell it in another at a
higher price.
Risks Associated with Derivatives
1. Market Risk: The risk of losses due to adverse price movements of the
underlying asset.
2. Liquidity Risk: The risk that a trader may not be able to buy or sell derivatives
quickly enough to prevent a loss.
3. Counterparty Risk: The risk that the other party in the transaction may default
on their obligations.
The derivative market plays a crucial role in the financial system by providing tools for
risk management, speculation, and price discovery. While derivatives can offer
significant benefits, they also carry inherent risks that require careful management.
Understanding the various types of derivatives and their functions is essential for
participants in the financial markets.

MAJOR INDICES OF BSE AND NSE.

The Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) are two of
the largest stock exchanges in India, and each has its own major stock indices that serve
as benchmarks for the performance of the equity market. Here’s a detailed overview of
the major indices for both exchanges:
Major Indices of BSE
1. SENSEX (Sensitive Index): The SENSEX is the oldest and most widely tracked
stock market index in India, consisting of 30 of the largest and most actively
traded stocks listed on the BSE.
2. BSE 100: This index includes 100 companies from different sectors listed on the
BSE, providing a broader view of market performance compared to SENSEX.
 3. BSE 200: Comprising 200 stocks from various sectors, this index provides a
more diversified picture of the Indian stock market.
4. BSE Midcap: This index tracks the performance of midcap companies, which are
typically considered to have higher growth potential than large cap companies.
5. BSE Small cap: This index includes smaller companies that often have a higher
risk reward profile.
Major Indices of NSE
1. Nifty 50: The Nifty 50 is the flagship index of the NSE, consisting of 50 of the
largest and most liquid stocks listed on the exchange.
2. Nifty Next 50: This index includes 50 companies from the Nifty 100 index,
excluding the Nifty 50 stocks, thus representing the next tier of large cap
companies.
3. Nifty Midcap 100: Comprising 100 midcap stocks, this index focuses on
companies with medium market capitalization.
4. Nifty Small cap 100: This index tracks the performance of 100 smallcap
companies, highlighting the potential growth of smaller firms.
5. Nifty Bank: Comprising 12 major banking stocks listed on the NSE, this index is
a gauge of the performance of the banking sector.
These indices serve as essential tools for investors and analysts to assess the
performance of the stock market in India. They provide insights into market trends,
investor sentiment, and economic conditions. Tracking these indices can help investors
make informed decisions based on the overall market performance. 4o mini
DIFFERENT TRADERS IN THE SECONDARY MARKET
In the secondary market, various types of traders participate, each with different roles,
investment strategies, and influences on market dynamics. Here’s an overview of the
main types of traders in the secondary market:
1. Foreign Institutional Investors (FIIs): FIIs are investment funds or entities from
outside a country that invest in the financial markets of another country. They include
hedge funds, pension funds, mutual funds, and other types of investment organizations.
o FIIs play a significant role in increasing liquidity in the stock market and
providing capital to domestic companies.
o Their investment activities can significantly influence stock prices and market
trends.
2. Domestic Institutional Investors (DIIs): DIIs are domestic investment funds that
invest in the financial markets within their own country. They include entities like
mutual funds, insurance companies, pension funds, and banks.
o DIIs help stabilize the market by providing longterm capital and supporting price
stability.
o They often invest with a longer time horizon compared to retail investors.
3. Retail Investors: Retail investors are individual investors who buy and sell securities
for their personal accounts, rather than for an institution.
o Retail investors add liquidity to the market and can influence stock prices,
especially in smaller cap stocks.
o They often participate in market trends and contribute to the overall market
sentiment.
Each type of trader plays a crucial role in the functioning of the secondary market. FIIs
and DIIs often provide stability and liquidity, while retail investors contribute to market
dynamics through their trading activities.