Page 67 - DCOM507_STOCK_MARKET_OPERATIONS

Stock Market Operations

Notes 6. Budiwalas: He/she specializes in buying and selling simultaneously in different markets.
The difference between the buying prices in another market constitutes his profit. However,
he can transact such business only if a security is traded on more than one stock exchange
and if exchanged telephonically or ax-linked. In India, arbitraging has become a growing
business. Arbitraging requires prior application to the governing body “in order to avoid”
the evil of “joint account” with members of other stock exchanges and consequent
involvement of one exchange in the difficulties of another.
7. Security Dealer: This dealer specializes in trading in government securities. He/she mainly
acts as a jobber and takes the risks inherent in ready purchase and sale of securities. The
government securities are over the counter and not on the floor. They maintain daily
contacts with the Reserve Bank of India and common banks and other financial institutions.
As a result of their activities, government securities are quoted finely.

Margin Trading

Margin trading occur when investors who purchase stocks on margin borrow part of the purchase
price of the stock from their brokers, and leave purchased stocks with the brokerage firm in
street name because the securities are used as collateral for the loan. The interest rate of the
margin credit charged by the broker is typically 1.5% above the rate charged by the bank
making the loan. The bank rate (called the call money rate) is normally about 1% below the
prime rate.

1. Percentage margin: The ratio of the net worth, or “equity value” of the account to the
market value of the securities.
2. Maintenance margin: The required proportion of your equity to the total value of the
stock. It protects the broker if the stock price declines.
3. Margin call: If the percentage margin falls below the maintenance margin, the broker
issues a margin call requiring the investor to add new cash or securities to the margin
account. If the investor fails to provide the required funds in time, the broker will sell the
collateral stock to pay off the loan.

Self Assessment

State whether the following statements are true or false:
11. Exchanges have a trading floor where the buying and selling of securities take place.
12. Individuals or firms (brokers) do not require to purchase a seat or membership of the
stock exchange in order to obtain the right to trade securities there.
13. The trading that takes place on the floor of the stock exchange resembles an auction, as
members trying to sell a client’s stock strive to obtain the highest price possible, while
those representing the buyer-clients strive to obtain the lowest price possible.

3.7 Role of NSCCL

National Securities Clearing Corporation Ltd. (NSCCL) is a wholly owned subsidiary of NSE
and was incorporated in August 1995. It was the first clearing corporation to be established in
the country and also the first clearing corporation in the country to introduce settlement guarantee.
It was set up with the following objectives to:
1. Bring and sustain confidence in clearing and settlement of securities;
2. Promote and maintain, short and consistent settlement cycles;

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