Stock Exchange - Study Notes
Lesson summary
A stock exchange (stock market or share market) is an organised market for buying and selling corporate and government securities under well-defined rules. It is a key part of the capital market, ensures liquidity and transferability of securities, and channels savings into industry. It should be a place for safe investment, not a gambling den.
7.01 Origin, meaning and definition
- Amsterdam Stock Exchange, 1602, set up by the Dutch East India Company (VOC), later renamed Amsterdam Bourse: oldest in the world.
- London Stock Exchange: most popular in the world. Bombay Stock Exchange: oldest in India.
- India's first: the Native Share and Stock Brokers Association, recognised on 31 August 1957 under the Securities Contracts (Regulation) Act, 1956; later the Bombay Stock Exchange.
- Husband and Dockerary: stock exchanges are privately organised markets used to facilitate trading in securities.
- SCRA 1956: an association, organisation or body of individuals, incorporated or not, established to assist, regulate and control business in buying, selling and dealing in securities.
7.02 Functions
- Ready and continuous market (liquidity).
- Correct evaluation of securities through market quotations.
- Protection to investors.
- Proper channelisation of capital.
- Aid to capital formation.
- Facilities for speculation.
- Seasoning of securities.
- Clearing house of business information.
7.03 Features
- Market for securities.
- Deals in second-hand securities (secondary market).
- Regulates trade in securities; does not trade on its own account.
- Allows dealings only in listed securities.
- Transactions only through members and authorised brokers.
- Association of persons, registered or unregistered.
- Recognition from the Central Government.
- Works as per its rules and SEBI guidelines.
- Specific location: the trading circle.
- Financial barometer of the economy.
7.04 Benefits and limitations
| Group | Benefits |
|---|---|
| Community | Economic development, fund raising platform, diverting resources, capital formation, fund raiser for Government |
| Company | Goodwill, wide market, huge funds, bargaining strength |
| Investors | Liquidity, collateral value, investor protection, assessing real worth, mechanism to trade |
Limitations: lack of uniformity and control, no restriction on membership, failure to control unhealthy speculation, more than one charge in a place, non-insistence on margin, no proper regulation of listing.
7.05 Stock exchanges in India
There are 24 stock exchanges, 21 regional, plus NSE, OTCEI and ISE. ISE is promoted by 15 regional exchanges and based in Mumbai. Most use the Screen Based Trading System (SBTS).
| Trader | Role |
|---|---|
| Broker | Commission agent between buyers and sellers |
| Jobber (Taravaniwala) | Trades on own account, no commission |
| Remiser | Agent of a member, earns commission |
| Authorised clerk | Employee of a member, salary plus commission |
7.06 Speculators
| Type | Behaviour |
|---|---|
| Bull (Tejiwala) | Expects rise; buys now; optimistic |
| Bear (Mandiwala) | Expects fall; sells now; pessimistic |
| Stag | Cautious; sells new shares at a premium; premium hunter |
| Lame duck | Bear unable to fulfil his commitment |
7.07 and 7.08
A commodity exchange trades metals, energy, agricultural goods and livestock; its object is goods flow through risk reduction. Recent developments: NSMS (Pherwani Committee), NSE (November 1992), SHCIL (1986), NCDS, STCI (May 1994, RBI held 50.18 percent), NSDL (8 November 1996), Nifty (50 stocks), Sensex (30 stocks), equity trading 9:15 a.m. to 3:30 p.m., futures and options markets, Dalal Street, Lombard Street and Wall Street.