Working of Stock Exchange
Meaning of Stock Exchange
A Stock Exchange can be defined as a well-organized market where shares, debentures, and bonds issued by the private sector companies, public enterprises, government companies are bought and sold.
Under the Securities Contract Act, 1956, Stock Exchange is defined as “an association, organisation or body of individuals whether incorporated or not, established for the purpose of assisting, regulating, and controlling business in buying and selling and dealing in securities.”
Stock Exchange is organized and managed by association, organization, or body of individuals. It is operated in accordance with the rules and guidelines issued by the Securities and Exchange Board of India (SEBI).
Features of Stock Exchange
- Stock Exchange is a well-organized marketplace where securities issued by companies, private sector enterprises, and government corporations, are bought and sold.
- It is organized and managed by an association, organization, or body of individuals.
- Only listed securities are dealt with in it.
- It is organized to assist and regulate the purchasing and selling of securities.
- Only authorized brokers and members can buy or sell securities.
Functions of Stock Exchange
- Ready Market: Stock Exchange provides a ready and well-organized market for the securities, shares and debentures issued by various enterprises. Stock Exchange helps in increasing the liquidity of shares. Thus, this attracts more people to invest in the company.
- Determining the value of Shares: Stock Exchange helps in determining the value of various securities issued by different companies. Regular purchase and sale of securities in the stock market results in evaluation in their price. The price at which trading take place are recorded as quotations. Later these quotations are made public in the form of market quotations. There is a regular valuation of securities.
- Capital Formation: Stock exchange helps in mobilizing the saving of individuals by convincing them to invest their savings in the securities of companies that yield high returns. This facilitates capital formation in the country.
- Safety of Dealing: Stock Exchange acts strictly in accordance with well-established rules and regulations. It ensures fair dealing and the safety of investments. Investors are free to fund the securities of their choice without any fear. To be specific, the stock exchange protects the interest of investors.
- Economic Barometer: Stock exchange acts as a barometer of the economy. It shows the booms, depression, recession, recovery, etc. by the index of prices of multiple securities sustained by stock exchange. This helps in analyzing the cause of change in the business climate.
- Regulating Company Management: All companies have to follow the rules and regulations framed by the Stock Exchange in order to get their securities listed. These rules positively influence the regular working and management of a company.
Types of Capital Market
There are two types of capital Market-
- Organised Capital Market
- Unorganised Capital Market
- Organised Capital Market- Organized capital market means such capital market which is bound by any rule and controlled by the government or any other institution of the government. The Indian capital market is regulated by the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India.
There are two types of Organised Capital Market termed Primary Market and Secondary Market-
- Primary Market: In the Primary market, newly issued shares, securities, bonds, and debentures are bought and sold. Companies register themselves and issue securities for the first time. In this process new as well as old Companies enter the primary market with the purpose of raising funds. When a company offers its share to the public for the first time with the purpose of raising funds, it is called Initial Public Offering(IPO).
- Secondary Market: The shares of a company are traded in the secondary market once they are issued in the primary market. In the secondary market, investors trade previously sold shares without any direct dealing with the company. The secondary market provides liquidity to the securities. In the secondary market, only those securities are dealt with which are listed in the stock market. Secondary market is of two categories –Auction Market and Dealer Market.
In the words of Payle, “Stock -Exchange is a place where listed securities are bought and sold for the purpose of investment or speculation.
Difference between Primary Market and Secondary Market
|Basis of Difference||Primary Market||Secondary Market|
|Nature||In the primary market, newly issued securities are purchased and sold.||In the secondary market, dealing is done in previously issued securities.|
|Objective||Companies enter the primary market with the purpose of raising funds.||Its objective is to provide liquidity for securities.|
|Location||There is no fixed venue or location for Primary Market||Secondary market has a fixed venue for dealing known as Stock Exchange|
|Sequence of Dealing||In the primary market, securities are traded for the first time.||In the secondary market, trading is done after the securities are sold in the primary market.|
|Price Determination||In this market, the price of securities is pre-determined by the issuing company.||In this market, the price of the share is determined on the basis of market conditions.|
|Entrance||In this market, any company can enter as per rules.||In this market, only listed companies can enter.|
2. Unorganised Capital Market-Unorganized capital market means such capital market which is not bound by any rule and controlled by the government or any other institution of the government. Domestic bankers, lenders and pawnbrokers are included in the unorganized capital market. By the way, these days, in the interest of investors, the Reserve Bank and SEBI have increased their screws in this area.
Types of Operators in Stock Exchange
Operators in Stock Exchange can be referred to as the members who can buy and sell securities. Some of the operators are given below.
- Brokers: Broker is a member of stock exchange who buys and sells securities on the behalf of person who are not the members. In return, he takes commission for his service called He is the intermediatory between the buyer and seller. Generally, a broker does not specialize in a particular line of security.
- Jobber: A Jobber is an independent dealer in a stock exchange who buys and sells securities on their own behalf for-profit motive. He buys securities from one member and sells them to other members for profit. Usually, jobbers deal in a particular line of securities.
- Tarawaniwala: Tarawaniwala is the individual who takes away the cream of business. He is neither a broker nor a full-time jobber. He generally deals for himself and works for profit. Sometimes, he acts as a commission agent and deals in securities on behalf of others.
- Bull: Bull (Tejiwala) is a speculator who expects a rise in the prices of securities. He buys securities at lower prices expecting a rise in price in near future. For example, a speculator A expects the price of ₹200 shares to rise on the settlement day. So, he buys, for instance, 500 shares. Assume that the price of the share rises to ₹220 on the settlement day. In such a venue, A earns a profit of ₹10,000.
- Bear: Bear (Mandiwala) is a speculator who expects a downfall in the prices of securities. He offers to sell the securities of which he expects a downward trend of price. He aims to earn profit by an expected downfall in the price of security in the future. Bear not only expects a price downfall but also makes efforts for the desired fall.
Common Terms used in Stock Exchange
- Ex-dividend (x.d.): The term ‘Ex-dividend’ means excluding the dividend. It means that the buyer of the share will have no right to receive the dividend proclaim by the company. A share is quoted with (x.d.) price when it is not possible to transfer share by the company or the share is sold after the ex-dividend date.
- Cum-dividend (c.d.): When the price of a share includes the receivable dividend it is said to be ‘Cum-Dividend’ It can be referred to as including the dividend. When a share is quoted on ‘cum-dividend’, the dividend of the share is received by the buyer and. In such a scenario, the cum-dividend price of share includes the dividend receivable. So, it is higher than the original price of the share.
- Bear Squeeze: When bears bring down the prices of shares. This situation is also known as bear-raid.
- Short Selling: Short Selling is the act of selling a large volume of securities without possessing them. In other words, short selling refers to a sale of those stocks that the seller doesn’t own. The seller then buys them at a lower price following a fall in the market price.
- Spot Delivery: A spot delivery (also referred to as ready delivery) contract is the one in which the securities are delivered on the spot or immediately after the actual (cash) payment of the price by the buyer. Such contracts need to be settled on the same day or after a short period. The date of settlement in such contract is fixed and there is no postponement of the date of settlement.
- Forward Delivery: Forward delivery contract is the one in which the delivery of the shares is to be made on a settlement date which is specified by the stock exchange. Such contracts can be settled on the settlement date if both the parties agree between themselves. This means that the date of settlement in such a contract can be postponed. These postponements are known as “Badla or Carry-over”.
Major Stock Exchange in India
In Accordance with the Securities Contracts (Regulation) Act 1956, only the stock exchanges which are acknowledged by the central government can operate. As of 2022, there is a total of 9 Stock Markets in India. Read SEBI report on active Stock Exchanges. Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) are the two major stock exchanges of India.
- Bombay Stock Exchange
- National Stock Exchange of India
- Calcutta Stock Exchange Ltd.
- Indian Commodity Exchange Limited
- Metropolitan Stock Exchange of India Ltd. (will expire after Sep 15, 2022)
- Multi Commodity Exchange of India Ltd.
- National Commodity & Derivatives Exchange Ltd.
Bombay Stock Exchange (BSE)
BSE ltd. (also known as Bombay Stock Exchange Limited) is one of the major stock markets in India. It was founded in 1875 by a cotton merchant Mr. Premchand Roychand. BSE is the first stock market in Asia and 10th oldest Stock Exchange in the world. It is located on Dalal Street in Mumbai. The day-to-day functioning of BSE is regulated by the Governing Board of Directors comprising of 10 members. At present, Shri Ashish Kumar Chauhan is the Chief Regulatory Officer of Bombay Stock Exchange.
National Stock Exchange of India (NSE India)
NSE Ltd. (also called National Stock Exchange Limited) is the leading stock exchange in India. It is owned by India’s top financial companies, banks, and insurance companies. It is situated in Mumbai, Maharashtra. NSE was established in 1992. It was formed as a public limited company by all-India financial Institutions and Commercial banks.
NSE is divided into two segments for trading purposes.
- Capital Marker Segment: Capital Market segment deals with the buying and selling of shares and debentures.
- Wholesaler debt market segment: Wholesaler debt market segment of NSE India is concerned with the government securities, bonds of public sector undertaking etc. This segment is also called money market segment.
Stock Market Indices
Stock Market Index is a statistical measure that manifests the changes taking place in the stock markets. To construct the market index, some similar types of securities are taken from the leading companies that are already registered on the stock exchange.
Functions of Stock Market Indices
- The Stock Market Index acts like a barometer that shows the details about the market condition.
- Stock Index assists in revealing the financial Position of Companies.
- It helps investors in picking up the appropriate stock. Investing in equities involves risk. The benchmark indices of the Stock Market show the overall performance of Stock Exchanges.
Sensex is the market capitalization benchmark index of BSE in India. It is calculated based on top 30 major and most actively traded stocks in BSE. The Sensex is reviewed every 6 months. It is published in the month of June and December every year. It is the oldest stock market index and it is operated by Standard & Poor’s (S&P Global).
Sensex is calculated by the free-float capitalization method. In this method, companies are weighted based on their share of the total market capitalization of the index. This method reflects market trends based on the shares available for trade. The value of Sensex represents the movement of the Market. A low value of Sensex Represents that the value of shares is decreasing while a higher value represents that the value of shares is increasing.
Objective of Sensex
- Sensex helps in measuring the market movement.
- It acts as a benchmark for Fund Performance
CNX Nifty is the stock market index of the top 50 companies incorporated at NSE India. The term Nifty is derived from the combination of two words National and Fifty. It is managed and owned by the India Index Service and Products Limited (IISL).
Objectives of Nifty
- It helps investors and ordinary people to identify the market condition and performance of the economy of the nation.
- Nifty helps individuals and companies’ owners in measuring the market movement.
- Nifty is used as the benchmark for the performance of mutual funds.
- It helps shareholders in evaluating the management of their company by comparing the company’s performance with the market.
- Nifty is helpful in derivative trading (speculated trading).
Securities and Exchange Board of India (SEBI)
Securities and Exchange Board of India (SEBI) is a statutory regulated body established by the government of India to manage and regulate the working of stock exchange in India and to ensure fair dealing in stock markets. It was established on 12 April 1988 and was given statutory powers in 1992.
Objective of SEBI
- To monitor and regulate the working of stock markets in India.
- To create a fair dealing environment among the investors and companies issuing securities.
- To regulate a code of conduct and ensure fair practices for intermediaries like brokers, merchant bankers, etc.
- To provide safeguards the rights of investors and protect their interest to ensure a steady flow of saving into the market.
Functions of SEBI
- It checks price manipulation by prohibiting unfair practices in the share markets.
- It prohibits Insider Trading.
- It regulates business in the stock exchange by implementing its rules and regulations.
- It manages the working of collective investment schemes including mutual funds.
- It promotes and manages self-regulatory organizations.
- It manages the substantial acquisition of shares and the takeover of companies.
- It ensures fair dealing in stock markets and undertakes inspection, conduct inquiries, and audit of the stock exchanges and intermediaries.