STOCK EXCHANGES

Meaning:

It refers to an association or organization established for the purpose of assisting,

regulating, and controlling business in trading of securities.

Stock Exchanges can be defined as privately organized markets which are used to
facilitate trading in securities.

Example: NSE, BSE, Regional stock Exchanges etc.

Features of stock exchange

Characteristics or features of stock exchange are:-

1. Market for securities

2. Deals in second hand securities
3. Regulates trade in securities
4. Allows dealings only in listed securities
5. Transactions effected only through members
6. Association of persons
7. Recognition from central government
8. Working as per rules
9. Specific location
10. Financial barometers
11. Membership of the exchange

1. Market for securities: stock exchange is a market, where securities of corporate

bodies, government and semi-government bodies are bought and sold.

2. Deals in second hand securities: it deals with shares, debentures bonds and
such securities already issued by the companies. In short it deals with existing or
second hand securities and hence it is called secondary market.

1
3. Regulates trade in securities: stock exchange does not buy or sell any securities
on its own account. It merely provides the necessary infrastructure and facilitates
for trade in securities to its members and brokers who trade in securities. It
regulates the trade activities so as to ensure free and fair trade.

4. Allows dealings only in listed securities: in fact, stock exchanges maintain an

official list of securities that could be purchased and sold on its floor. Securities
which do not figure in the official list of stock exchange are called unlisted
securities. Such unlisted securities cannot be traded in the stock exchange.

5. Transactions effected only through members: all the transactions in securities

at the stock exchange are effected only through its authorized brokers and
members. Outsiders or direct investors are not allowed to enter in the trading
circles of the stock exchange. Investors have to buy or sell the securities at the
stock exchange through the authorized brokers only.

6. Association of persons: a stock exchange is an association of persons or body

of individuals which may be registered or unregistered.

7. Recognition from central government: stock exchange is an organized market.

It requires recognition from central government.

8. Working as per rules: buying and selling transactions in securities at the stock
exchange are governed by the rules and regulations of stock exchange as well as
SEBI guidelines. No deviation from the rules and guidelines is allowed in any case.

9. Specific location: stock exchange is a particular market place where authorized

brokers come together daily (i.e. on working days) on the floor of market called
trading circles and conduct trading activities. The prices of different securities
traded are shown on electronic boards. After the working hours markets is closed.
All the working of stock exchanges is conducted and controlled through
computers and electronic system.

10. Financial barometers: stock exchange is the financial barometers and

development indicators of national economy of the country. Industrial growth
and stability is reflected in the index of stock exchange.

2
11. Membership of the exchange: it is open to corporate entities, individuals and
partnership firms who fulfill the eligibility criteria laid down by SEBI and NSE.

Functions of stock exchange

{Note: refer to secondary market functions}

Regulatory framework of stock exchange

The governing body of the stock exchange

The governing body of the stock exchange consists of 13 members of which 6

members of the stock exchange are elected by the members of the stock
exchange.

(a) Central government nominates not more than 3 members

(b) The board nominates 3 public representatives
(c) SEBI nominates persons not exceeding 3 and
(d) The stock exchange appoints one executive director.

Recognition of stock exchange-procedures

The stock exchanges in India have to be recognized by the central government

under the securities contract regulation act, 1956 and SEBI and they have to
comply with the provisions of SCRA and also the bye-laws and regulations duty
approved by the government.

Any stock exchanges needs recognition under SEBI act has to submit the
application along with the bye-laws of the stock exchange for its operation and a
copy of the rules relating to its constitution, governing body, powers and duties of
the office bearers, the admission procedure etc.

Membership rules in a stock exchange

To be a member a person has to conform certain rules and regulations specified

under the securities exchange board of India. These rules are as follows,

3
 1. He should not be less than 21 years of age, Indian citizen, not bankrupt
2. Not compounded with the creditors
3. Not compounded with creditors, fraud or dishonesty
4. Not a defaulter of any other stock exchange.

Listing of securities

When listing is granted to a company, it means that the securities are included in
the official list of the stock exchange for the purpose of trading. Security listing
ensures that, a company is solvent and its existence is legal. Government security
is not required to be listed.

NATIONAL STOCK EXCHANGE (NSE)

National stock exchange incorporated in the year 1992, provides trading in equity
as well as debt market. Maximum volumes take place on NSE and hence enjoy
leadership position in the country today.

Features of National Stock Exchange;

• NSE was set up by leading institutions to provide a modern, fully automated

screen-based trading system with national reach.
• The exchange is very transparent in its transactions, speed and efficiency,
safety and market integrity. It has set up facilities that server as model for
the securities industry in terms of systems, practices and procedures
• NSE has played a catalytic role in reforming the Indian securities market in
terms of microstructure, are practices and trading volumes.
• The market today uses state-of-art information technology to provide an
efficient and transparent trading, clearing and settlement mechanism, and
has witnessed several innovations in products and services.

BOMBAY STOCK EXCHANGE (BSE)

BSE on the other hand was set up in the year 1875 and is the oldest stock
exchange in asia.it has evolved in to its present status as the premier stock

4
exchange. At BSE you will find some scripts listed that are not available on NSE.
Also BSE has the largest number of scripts which are listed.

Features of Bombay stock exchange;

• Bombay stock exchange, now known as ‘BSE Limited’.

• It is the oldest stock exchange in the entire Asia.
• It is located in Dalal Street,Mumbai.
• It has the largest number of companies of the world listed on it.
• The BSE Sensex, which is otherwise known as ‘BSE 30’, is most commonly
used term while referring to the trading volume in India and Asia.
• When compared with NSE (National stock exchange), BSI has quite similar
statistics in terms of total market capitalization but in terms of share
volumes, NSE is almost twice of BSE.
• As per the securities contracts regulation Act, BSE is the first stock
exchange to be recognized by the government of India in 1956.
• BSE switched to electronic trading system in 1995 and took only fifty days
for this transition.
• ‘BOLT’ or the ‘BSE On line trading’ is the automated version of the trading
platform, which is screen based and currently has a capacity of 8 million
orders per day.

Over The Counter Exchange of India (OTCEI)

The (OTCEI) over the counter exchange of India, is based on Mumbai,

Maharashtra. It is India’s first exchange for small companies, as well as the first
screen-based nationwide stock exchange in India.

OTCEI is promoted by the unit trust of India, the industrial credit and Investment
Corporation of India, the industrial development bank of India, the industrial
finance corporation of India, and other institutions, and is a recognized stock
exchange under SCR act.

Benefits of stock Exchanges(Refer to class work-Chart)

5
Advantages of OTCEI:

• Greater liquidity and lesser risk of intermediary charges due to widely

spread trading mechanism across India.
• The screen-based scrip less trading ensures transparency and accuracy of
prices
• Faster settlement and transfer process as compared to other exchanges
• Shorter allotment procedure (in case of new issue) than other exchanges
•
Meaning of important terms

I. Online trading –
Online trading is basically the act of buying and selling financial products
through an online trading platform. These platforms are normally provided
by internet based brokers and available to every single person who wishes
to trade in the stock market, to buy shares and debentures. It is also
available in the platform like FOREX, which provides a variety of financial
products including shares, commodities indices and FOREX.

Advantages of online trading:

• The stock markets are open 24/7

• Online trading platforms
• Speedy transactions
• Real-time progress

Disadvantages of online trading:

• Loss of funds
• Trading can become addictive
• Computerized trading
• Trading news and updates

II. Insider trading –

6
Insider trading is the illegal practice of trading on the stock exchange to one’s own
advantage through having access to confidential information. Insider trading
refers to the trading of securities by corporate insiders such as managers or
executives.

This illegal buying and selling of a company shares by people who have special
information because they are involved with the company: individuals who engage
in illegal insider trading attempt to benefit from trades based on information
about a company not yet made public.

III. Short selling in trade –

When a trader sells a security with the intension of repurchasing it later at a lower
price, it is called as short selling.

The short selling is part and parcel of stock markets where in many traders sell
various stocks at current market price, with an expectation that the prices would
fall and they would buy it back at lesser prices and make some profits.

IV. Stock Brokers –

A stock broker is a professional who executes buy and sell orders for stocks and
other securities on behalf of clients. A stock broker may also be known as
registered representative, investment advisor or simply broker. Stock brokers are
usually associated with a brokerage firm and handle transactions for retail and
institutional customers alike. Stockbrokers often receive commission for their
services.

V. Speculation–

Speculation refers to buying the securities when prices are low and sell the same
when there is increase in price. Difference between buying price and selling price
will be speculation profit.

7
Speculation refers to act of conducting a financial transaction that has substantial
risk of losing value but also holds the expectation of a significant gain.

Kinds of speculators/brokers in stock exchange

▪ Jobber: jobber is a professional speculator who has complete

information regarding the particular shares he deals. He transacts the
shares of profit. He conducts the securities in his own name. He is the
member of the stock exchange.
▪ Broker: broker is a person who transacts business in securities on
behalf of his clients and receives commission for his services. He
deals between jobbers and members outside the house. He is an
experienced agent of the public.
▪ Bull: He is always in a position to dispose securities which he does
not possess. He makes profit on each transaction. He sells the various
securities for the objectives of taking advantages of an expected fall
in prices.
▪ Lame duck: when bear fails to meet his obligations he struggles to
meet finance like lame duck. This may happen when he has been
concerned. Generally a bear agrees to dispose of certain shares on
specific date. But sometimes he fails to deliver due to non-availability
of shares in the market. If the other party refuses to postpone the
delivery them lame duck suffers heavy losses.
▪ Stag: he is also a speculator. He purchases the shares of newly
floated company and shown himself a genuine investor. He is not
willing to become an actual shareholder of the company. He
purchases the shares to sell them above the par value to earn
premium. A stag also suffers losses.
▪ Contango: contango means to come over dealing to the settlement.
The broker is paid a reward to carry the settlement, it is also known
as contago. It is paid the buyers; to the brokers.in some cases buyers
in unable make the payment of securities on any particular date. So
he requests the brokers to carry on the dealing to the next
settlement.
8