Stock Exchange

Semester II 2013

 Stock exchange is a market in which securities are bought and sold and it is an essential component of a developed capital market. According to the Securities Contracts (Regulation) Act, 1956, Stock Exchange means any body of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities.
Securities include: Shares, scrips, stocks, bonds, debentures, stock or other marketable securities of a like nature Government securities Rights or interest in securities. Stock Exchange is an important part of the Capitalistic system of economy. It is indispensable for the smooth functioning of a corporate enterprise. It provides the necessary mobility to capital and directs the flow of capital into profitable and successful enterprises. It exerts a powerful and significant influence as a depressant or stimulant of business activity. It maybe defined as the place or market where securities of joint stock companies and of government or semi government bodies are dealt in.

Importance: Only an organized securities market can provide sufficient marketability and price continuity for shares Is only such a market that can provide reasonable measure of safety and fair dealing in buying and selling of securities. Through the interplay of demand for and supply of securities, properly organized stock exchange results in a reasonably correct evaluation of securities in terms of their real worth. Through such evaluation of securities, the stock exchange helps in the orderly flow of savings between different types of investments. Objective and Role of Stock Exchange:
To safeguard the interest of investing public To establish and promote honorable and jus practices in securities transactions. To promote, develop and maintain a well regulated market for dealing in securities. To promote industrial development in the country through efficient resource mobilization by way of investment in corporate securities.

 Dealings on the Stock exchange are subject to the bye-laws and rules of the Stock Exchange. Stock exchange dealings in India are regulated by the Securities Contracts (Regulation) Act and the Securities and exchange Board of India (SEBI). There are two important types of trading on the stock exchange namely Ready Delivery and Forward Delivery Contract.
Ready Delivery contract, also known as cash trading or cash transactions, are to be settled either on the same date or within a short period that may extend at best upto seven days. (If the payment and delivery of securities is on the same day or on the next day, it may be called Spot Delivery Contract). Fixed Delivery contracts are discharged on fixed settlement days. They are confined to those securities which are placed on the forward lists.

Speculation on the Stock Exchange

Stock exchange transactions are made either for the purpose of investment or speculation.
Investment transactions are made with the idea of earning a return on the securities by holding them more or less permanently whereas speculative transactions are made with the intention of making gains by disposing of the securities at favorable prices.

Investment transactions require actual delivery of securities on the part of sellers and the payment of their full price by its buyers. Speculative transactions does not involve full payment for and taking delivery of the securities that the speculators have contracted to transfer. The transaction can be made by the deposit of a fractional part of the price. The volume of speculative transaction far exceed that of investment transaction on a stock exchange. It is therefore argued that speculation is necessary to ensure sufficient volume and continuity of business in the stock exchange. There are 23 stock exchanges functioning in India including the OTCEI (Over the Counter Exchange of India) and the National Stock Exchange (NSE). The Bombay Stock exchange established in 1878 is the oldest in Asia. There are over 10,000 companies listed and the number of investors is also one of the largest in the world. Only members and their authorized clerks can enter the trading floor and conduct buying and selling of securities

Types of Speculator:
Bull: Is a speculator who buys shares in the expectation of selling it at a higher price. Bear: Sells securities in the expectation of a fall in their prices in future. Stag: Neither buys nor sells but applies for subscription to the new issues expecting that he can sell them later at a premium. Option Dealing: Option is the right to buy or sell a certain quantity of the security at a certain price within a certain time. The option to buy is known as Call Option and the option to sell is know as a Put Option. In an option dealing, the speculator is given the right or option to buy or sell, or both buy and sell as the case maybe on the settlement day or else he will forfeit the option money. Carry Over (Badla) transaction: This refers to the facility of carry-over of the completion of a forward contract to another / next settlement period any number of times on payment of the badla charge

 The OTCEI was incorporated in 1990 and became fully operational in 1992. The OTCEI is meant primarily to trade securities of the listed companies, like the other stock exchanges. Yet there is no physical location of the OTCEI, no counters, no trading ring, no stock exchange building. The OTC markets are fully automated exchanges where transactions are completed through a network of telephones and computers. Over the Counter basically implies trading across the counter in scrips which are listed on the stock exchange. The minimum issued capital of a company for eligibility for listing on the OTCEI is Rs. 30 lakhs, subject to a minimum public offer of equity shares worth Rs. 20 lakhs. Any company which wants to list its shares on the OTCEI will have to be sponsored by a sponsor. Features: The OTCEI is a company promoted by Financial Institutions There are many restrictions on listing on the OTCEI. A Company listed on any other recognized stock exchange in India would not simultaneously be eligible for listing on the OTCEI. Method of price fixation differs b/w OTCEI and other Exchanges. On the OTCEI the pricing of scrips is regulated while speculation could cause wide price fluctuations on the regular exchanges

Over The Counter Exchange of India

Over The Counter Exchange of India

Features (contd.) The OTC Exchange is a market for spot deals only The settlement takes place daily The OTCEI permits automatic transfer upto 0.5% of a companys equity while in other stock exchanges permission of the companies is needed. Spread does not exceed a specific percentage The OTCEI is characterized by a decentralized working Benefits:
Quick payment of money Price transparency Saves the investor from other unscrupulous behavior of the brokers. Simple procedure of buying and selling Facility to sell even odd lots Liquidity even for scrips of small and new companies Facilitates new issues at lower costs Makes raising of capital through issues very easy for small, new and closely held companies.

National Stock Exchange (NSE)

This was established on 1994 by financial institutions with IDBI as a nodal agency. The NSE was conceived as a model exchange with a nation wide electronic screen based scripless and floorless trading system in securities which is both efficient and transparent and offer equal and nation wide access to investors. NSE operates on the National Exchange for Automated Trading (NEAT), a fully automated screen based trading system which adopts the principle of an order driven market.

The NSE operates in: Wholesale Debt market Capital Market.

Objectives:
To establish nation wide trading facility for equities, debts and hybrids. To facilitate equal access to investors across the country. To provide fairness, efficiency and transparency to the securities trading To enable shorter settlement cycles To meet international securities market standard

National Stock Exchange (NSE)

Features of NSE: The NSE employs a fully automated screen based trading system It has two segments ie the Wholesale Debt market and the Capital market. There is no trading floor The trading member in the capital market segment are linked through a satellite link-up while those in the Wholesale Debt market segment are linked through dedicated high speed lines. The NSE has opted for an order driven system. When a trade takes place, a trade confirmation slip is printed at the trading members workstation. The identity of the trading member is not revealed to others when he place the order. Therefore, large orders can be placed without influencing the market sentiment. The automated trading system secures the best price available in the market

Securities Contracts (Regulation) Act:

Enacted in 1956 and came into force in 1957. Objectives: The objective of the Act is it prevent undesirable transactions in securities by regulating the business if dealings in securities and by providing for certain matters connected with transaction in securities. To empower the RBI to regulate the dealings in and functioning of the stock exchange in India To promote healthy and orderly development of the stock market To prevent unhealthy speculation and other undesirable activities on the stock exchange To protect the interest of the investors To provide for reasonable uniformity in respect of the bye-laws and rules of the different stock exchanges of India.

Securities Contracts (Regulation) Act:

Main Provisions: The Act empowers the Central Government or in some cases SEBI pertaining to: The grant of recognition or withdrawal of recognition to any stock exchange Approval of the bye-laws and rules of stock exchange Power to direct the stock exchange to make or amend rules and bye-laws Monitoring the activities and functioning of the stock exchanges by calling for periodic returns and specific information Power to suspend business of any stock exchange Power to supersede the governing body of any stock exchange on account of specific reasons Regulation of listing of securities.

Securities and Exchange Board of India

The SEBI was constituted in 1988 by a resolution of GOI and it was made a statutory body by the Securities and and Exchange Board of India Act, 1992. The Act empowers the Central Government to supersede SEBI if on account of emergency, SEBI is unable to perform the functions and duties under any provision of the ACT. Objective: To protect the interests of investors in securities and to promote the development of and to regulate the securities market for matters connected therewith. Powers and Functions: Regulates the business in stock exchanges and any other securities market. Registering and regulating the working of stock brokers, sub-brokers etc. Registering and regulating the working of collective investment schemes Promoting and regulating self regulatory organizations Prohibiting fraudulent and unfair trade practices in securities market Promoting investor education and training of intermediaries in securities market Prohibiting insider trading in securities. Regulating substantial acquisition of shares and take-over by companies Conducting inspection and inquiries Levying fees or other charges Conducting research