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STOCK EXCHANGES AND THEIR ROLE

A stock exchange is a form of exchange which provides services for stock brokers and traders to
trade stocks, bonds, and other securities. Stock exchanges also provide facilities for issue and
redemption of securities and other financial instruments, and capital events including the
payment of income and dividends. Securities traded on a stock exchange include stock issued
by companies, unit trusts, derivatives, pooled investment products and bonds. Stock exchanges
often function as "continuous auction" markets, with buyers and sellers consummating
transactions at a central location, such as the floor of the exchange.
To be able to trade a security on a certain stock exchange, it must be listed there. Usually, there
is a central location at least for record keeping, but trade is increasingly less linked to such a
physical place, as modern markets are electronic networks, which gives them advantages of
increased speed and reduced cost of transactions. Trade on an exchange is by members only.
The initial offering of stocks and bonds to investors is by definition done in the primary market
and subsequent trading is done in the secondary market. A stock exchange is often the most
important component of a stock market. Supply and demand in stock markets are driven by
various factors that, as in all free markets, affect the price of stocks (see stock valuation).
There is usually no compulsion to issue stock via the stock exchange itself, nor must stock be
subsequently traded on the exchange. Such trading is said to be off exchange or over-the-
counter. This is the usual way that derivatives and bonds are traded. Increasingly, stock
exchanges are part of a global market for securities.
In recent years, various other trading venues, such as electronic communications networks,
alternative trading systems and "dark pools" have taken much of the trading activity away from
traditional
Moreover the establishment of National Stock Exchange and Bombay Stock Exchange has been
turning point in the working of capital markets. Recently the RBI has allowed participation of
individuals in the government securities markets. This move is likely to open new avenues for
investment to individuals. Moreover the Finance Ministry has announced the removal of
income tax on dividend in the hands of the receiver and no capital gains tax on investments
made in equity after 1.3.03 and held for one year.

The two major stock exchanges in India are:-
Bombay Stock Exchange (BSE)
National Stock Exchange (NSE)
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1.1 1.2 Bombay Stock Exchange
The Bombay Stock Exchange is one of the oldest stock exchanges in Asia. It was established
as "The Native Share & Stock Brokers Association" in 1875. It is the first stock exchange in
the country to obtain permanent recognition in 1956 from the Government of India under
the Securities Contracts (Regulation) Act, 1956. The Exchange's pivotal and pre-eminent role
in the development of the Indian capital market is widely recognized and its index, SENSEX, is
tracked worldwide.
1.2 SENSEX
The Stock Exchange, Mumbai (BSE) in 1986 came out with a stock index that subsequently
became the barometer of the Indian stock market.
SENSEX is not only scientifically designed but also based on globally accepted construction
and review methodology. First compiled in 1986, SENSEX is a basket of 30 constituent stocks
representing a sample of large, liquid and representative companies. The base year of
SENSEX is 1978-79 and the base value is 100. The index is widely reported in both domestic
and international markets through print as well as electronic media.
Due to is wide acceptance amongst the Indian investors; SENSEX is regarded to be the pulse
of the Indian stock market. As the oldest index in the country, it provides the time series data
over a fairly long period of time. Small wonder, the SENSEX has over the years become one of
the most prominent brands in the country.
The SENSEX captured all these events in the most judicial manner. One can identify the
booms and busts of the Indian stock market through SENSEX.
The launch of SENSEX in 1986 was later followed up in January 1989 by introduction of BSE
National Index (Base: 1983-84 = 100). It comprised of 100 stocks listed at five major stock
exchanges.
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The values of all BSE indices are updated every 15 seconds during the market hours and
displayed through the BOLT system, BSE website and news wire agencies.
All BSE-indices are reviewed periodically by the index committee of the exchange.

1.3 1.2 National Stock Exchange
With the liberalization of the Indian economy, it was found inevitable to lift the Indian stock
market trading system on par with the international standards. On the basis of the
recommendations of high powered Pherwani Committee.
The National Stock Exchange 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.
The National Stock Exchange (NSE) is India's leading stock exchange covering various cities
and towns across the country. NSE was set up by leading institutions to provide a modern,
fully automated screen-based trading system with national reach. The Exchange has brought
about unparalleled transparency, speed & efficiency, safety and market integrity. It has set up
facilities that serve as a model for the securities industry in terms of systems, practices and
procedures.
1.4 CONCEPT OF STOCK EXCHANGE
The Securities Contracts (Regulation) Act, 1956, has defined Stock Exchange as an "association,
organization or body of individuals, whether incorporated or not, established for the purpose of
assisting, regulating and controlling business of buying, selling and dealing in Securities".
Stock exchange as an organized security market provides marketability and price continuity for
shares and helps in a fair evaluation of securities in terms of their intrinsic worth. Thus it helps
orderly flow and distribution of savings between different types of investments. This institution
performs an important part in the economic life of a country, acting as a free market for
securities where prices are determined by the forces of supply and demand. Apart from the
above basic function it also assists in mobilizing funds for the Government and the Industry and
to supply a channel for the investment of savings in the performance of its functions.
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The Stock Exchanges in India as elsewhere have a vital role to play in the development of the
country in general and industrial growth of companies in the private sector in particular and
helps the Government to raise internal resources for the implementation of various
development programmes in the public sector. As a segment of the capital market it performs
an important function in mobilizing and channelising resources which remain otherwise
scattered. Thus the Stock Exchanges tap the new resources and stimulate a broad based
investment in the capital structure of industries.
A well developed and healthy stock exchange can be and should be an important institution in
building up a property base alongwith a socialist in India with broader distribution of wealth
and income. Thus Stock Exchange is a vital organ in a modern society. Without a stock exchange
a modern democratic economy cannot exist. The system of joint stock companies financed
through the public investment as emerged has put the vast means of finances almost to
enterpreneurs' needs.
Finance from external sources mainly from the investing public can become possible only when
an institute like Stock Exchange provides opportunities for the conversion of scattered savings
into profitable investments with the promises of a reasonable yield and minimum element of
risk. Such a mechanism as provided by Stock Exchanges is not merely a source of capital but
also a conduit which channelises the savings into investment alongwith a free movement of
capital.
With the probable exception of a totalitarian state no Government will be able to mobilize
resources from the public if the money market in the form of stock exchange does not exist.
The Stock Exchange benefits the entire community in a variety of way. It enables the producers
to raise capital which directly and indirectly gives gainful employment to millions of people on
the one hand and helps consumers to get ;the variety of goods needed by them on the other. It
provides opportunities to savers to store the value either as temporary abode of purchasing
power or as a permanent abode of purchasing power in the form of financial assets. It also
helps the segments of the savers who put their savings in commercial firms and non-banking
financial intermediaries because these institutions avail themselves of the services of Stock
Exchange to invest the money thus collected.
The Stock Exchange comes close enough to a perfectly competitive market allowing the forces
of demand and supply a reasonable degree of freedom to operate as compared to other
markets specially the commodity markets. This segment of the factor market can be considered
as a perfect or a nearly perfect market. Apart from providing a mechanism for transacting
business in stock and shares it generates genuine potential for a new entrepreneur to take up
initiative in the private sector enterprises and allows the expansion of investing
community by offering gainful development of their otherwise sluggish or shy capital. The
Stock Exchange must assume the responsibility of protecting the rights of investors specially
the small investors in the Joint Stock Company.
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There are two important operation carried on in these markets:

1. The raising the new capital
2. Trading in securities already issued by the companies.
Role of Stock Exchange in the Development of Indian Capital Market
Capital occupies a position so dominant to the economic theory of production and distribution
that it is natural to assume that it should occupy at least an equally important place in the
theory and practice of economic growth. The subject whether approached historically or
analytically or from the standpoint of policy, it is the process of capital accumulation that
occupies the front of the stage. It is usually implied that economic growth and capital
accumulation with a high positive and significant correlation and additions to the stock of
capital can provoke and facilitate faster rate of growth even under the circumstances which can
be described as shortage of capital.
The aforesaid correlation between the process of economic growth and capital accumulation
inspired the earlier theorists of economic development and even in the works of modern
economists output is still assumed to be limited by capital whether there is abundant labour or
not. A high rate of capital formation usually results in rapid growth in the production and
income, but more capital formation by itself will not bring a corresponding acceleration in the
growth of production. It also depends to a large extent on the manner in which the capital is
utilized.
Moreover the establishment of National Stock Exchange and Bombay Stock Exchange has been
turning point in the working of capital markets. Recently the RBI has allowed participation of
individuals in the government securities markets. This move is likely to open new avenues for
investment to individuals. Moreover the Finance Ministry has announced the removal of
income tax on dividend in the hands of the receiver and no capital gains tax on investments
made in equity after 1.3.03 and held for one year.
Role of Stock Exchanges are varied and highly important in the development of economy of a
country. They measure and control the growth of a country.
Stock markets are the places, where exactly you do your business. Your stock trading
transactions are executed at the stock exchanges through your broker, unless you have a
membership with that exchange, which enable you to trade directly.
Stock exchange apart from being hub of primary and secondary market, they have very
important role to play in the economy of the country. Some of them are listed below.
Raising capital for businesses
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Exchanges help companies to capitalize by selling shares to the investing public. Stock market is
an important part of the economy of a country. The stock market plays a play a pivotal role in
the growth of the industry and commerce of the country that eventually affects the economy of
the country to a great extent. That is reason that the government, industry and even the central
banks of the country keep a close watch on the happenings of the stock market. The stock
market is important from both the industrys point of view as well as the investors point of
view.
Whenever a company wants to raise funds for further expansion or settling up a new business
venture, they have to either take a loan from a financial organization or they have to issue
shares through the stock market. In fact the stock market is the primary source for any
company to raise funds for business expansions. If a company wants to raise some capital for
the business it can issue shares of the company that is basically part ownership of the company.
To issue shares for the investors to invest in the stocks a company needs to get listed to a
stocks exchange and through the primary market of the stock exchange they can issue the
shares and get the funds for business requirements. There are certain rules and regulations for
getting listed at a stock exchange and they need to fulfill some criteria to issue stocks and go
public. The stock market is primarily the place where these companies get listed to issue the
shares and raise the fund. In case of an already listed public company, they issue more shares
to the market for collecting more funds for business expansion. For the companies which are
going public for the first time, they need to start with the Initial Public Offering or the IPO. In
both the cases these companies have to go through the stock market.
This is the primary function of the stock exchange and thus they play the most important role of
supporting the growth of the industry and commerce in the country. That is the reason that a
rising stock market is the sign of a developing industrial sector and a growing economy of the
country.
Of course this is just the primary function of the stock market and just an half of the role that
the stock market plays. The secondary function of the stock market is that the market plays the
role of a common platform for the buyers and sellers of these stocks that are listed at the stock
market. It is the secondary market of the stock exchange where retail investors and institutional
investors buy and sell the stocks. In fact it is these stock market traders who raise the fund for
the businesses by investing in the stocks.
Mobilizing savings for investment
They help public to mobilize their savings to invest in high yielding economic sectors, which
results in higher yield, both to the individual and to the national economy.
Facilitating company growth
They help companies to expand and grow by acquisition or fusion.
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Profit sharing
They help both casual and professional stock investors, to get their share in the wealth of
profitable businesses.
Corporate governance
Stock exchanges impose stringent rules to get listed in them. So listed public companies have
better management records than privately held companies.
Creating investment opportunities for small investors
Small investors can also participate in the growth of large companies, by buying a small number
of shares.
Government capital raising for development projects
They help government to rise fund for developmental activities through the issue of bonds. An
investor who buys them will be lending money to the government, which is more secure, and
sometimes enjoys tax benefits also.
Barometer of the economy
They maintain the stock indexes which are the indicators of the general trend in the economy.
They also regulate the stock price fluctuations.