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Chapter 12 - Stock Exchange

Chapter 12 - Stock Exchange. aaj market upar gaya. aaj market gir gaya. INDEX. CONTROL SLIDE. HOME. EXIT. INTRODUCTION. The very first stock exchange in Mumbai was started by four Gujaratis and one Parsi who would gather under the Banyan tree in front of Mumbai’s town hall.

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Chapter 12 - Stock Exchange

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  1. Chapter 12 - Stock Exchange

  2. aaj market upargaya aaj market girgaya

  3. INDEX CONTROL SLIDE HOME EXIT

  4. INTRODUCTION The very first stock exchange in Mumbai was started by four Gujaratis and one Parsi who would gather under the Banyan tree in front of Mumbai’s town hall. The location of these meetings started changing as number of people increased. The increase in popularity resulted in formation of “The Native Share & Stock Brokers Association” in 1875 which is now famously known as “Bombay Stock Exchange”. For most of us, Bombay Stock Exchange and share market is one and the same. However, BSE is just one part of the share market.

  5. INTRODUCTION • Stock market fascinates everyone because people have false assumption that it multiplies money at very fast rate. Therefore, it is very important to have the knowledge of stock market and stock exchanges before you decide to join the mass and jump into it. • Difference between stock exchange and stock market • Stock exchange is a place where securities are listed and are bought and sold. • Stock market is a wider term as compared to stock exchange. It comprises of various stock exchanges (like BSE, NSE, Ahmedabad stock exchange) etc, investors, companies and brokers.

  6. IMPORTANT TERMS

  7. IMPORTANT TERMS • STOCK BROKER: • Common man can trade through a member. • Stock broker is a member of stock exchange. • They earn brokerage / commission on each transaction. • Individuals and companies can be a broker. • Eg. Sharekhan, Angel Broking, Ventura Securities, MotilalOswal etc.

  8. IMPORTANT TERMS • LISTING: • Listing refers to entering the name of company’s securities in the register of stock exchange. Once a company is listed, people can buy / sell shares of those companies online.

  9. IMPORTANT TERMS • TRADER (JOBBER) • Jobber is a trader in stock exchange who carries out speculative trades in his own name. • Jobbers square off their position on the same day and do not carry forward their holding to the next day. • Jobber is not allowed to deal with investors directly.

  10. IMPORTANT TERMS For your understanding: “square off” means to close the transaction. E.g., if a jobber has bought 100 shares in the morning, then before end of the day the jobber will sell off those 100 shares and thus square off transaction. BUY 100 SHARES SELL 100 SHARES

  11. IMPORTANT TERMS • BULL • A trader who expects the market / shares to perform well and expects that the share prices will rise. • RakeshJhunjhunwala is called the “bull” of the Indian markets.

  12. IMPORTANT TERMS • BEAR • A trader who expects that the market / shares will not perform and the share prices will go down.

  13. BEAR BULL

  14. IMPORTANT TERMS • CONTRACT NOTE • The contract note is a document which acts as evidence for purchase or sale of security. • For every trade, the broker sends a contract note clearly specifying the date and type of transaction, securities name, number of securities traded, rate, brokerage and taxes. • A broker has to compulsorily send a contract note to his client by end of the day.

  15. IMPORTANT TERMS • INSTITUTIONAL INVESTOR • Institutions such as banks, UTI, mutual funds, LIC, GIC, etc who invest in shares and securities are referred to as institutional investors. • These investors carry out transaction in huge volumes on stock exchange.

  16. IMPORTANT TERMS • STAG • Stag is a person who prefers to invest in primary market rather than secondary market.

  17. IMPORTANT TERMS • TRADING RING • The trading of securities takes place on the floor of stock exchange which is called as trading ring. • The usual trading hours are between 12 noon to 2.30 p.m. Trading hours for Bombay Stock Exchange is from 9.15 AM to 3.30 PM. Note: Trading ring used to exist when shares were traded offline i.e. physical mode. All the stock brokers used to gather on the floor of stock exchange to transact their business. However now, after demat of shares, trading is done online. TRADING RING DEMAT

  18. IMPORTANT TERMS • AUCTION • Auction is a method in which buyers bid for shares which are available for auction.

  19. SECURITY MARKET • SECURTIY MARKET Security market is divided into primary market and secondary market. • PRIMARY MARKET • SECONDARY MARKET • SECURITIES DIRECTLY ISSUED BY COMPANY TO INVESTORS • SECURITIES ALREADY ISSUED BY COMPANY TRADED • E.G. STOCK EXCHANGE

  20. SECURITY MARKET • Primary market – Primary market is that part of market where the securities are issued for the first time. Thus, companies directly sell the securities to investors. E.g. Initial Public Offer. The buyer is an investor whereas seller is a company. • Secondary market – Secondary market is that part of the capital market where already issued securities such as shares, bonds, debentures, etc are traded. The securities once issued in the primary market are then traded in the stock market. The buyer and seller, both, are investors.

  21. STOCK EXCHANGE

  22. MEANING • Stock exchange is a market place which provides organized services to trade in listed securities such as equity shares, preference shares, bonds, debentures, etc. Stock exchange facilitates buying and selling of securities. • As per Securities Contract Act, 1956 the term stock exchange is defined as “an association, organization or body of individuals, whether incorporated or not, established for the purpose of assisting, regulating and controlling of business in buying, selling and dealing in securities”. • As per the Husband and Dockerary, “Stock exchanges are privately organized markets which are used to facilitate trading in securities”.

  23. MANAGEMENT • The overall activities of stock exchange are managed by the executive committee. • The composition and powers of the executive committee differ from exchange to exchange. • The executive committee is supported by various other committees such as Advisory Committee, Listing Committee, Default Committee etc. • The members of the executive committee are usually selected for a period of one year and retire by rotation.

  24. MANAGEMENT This executive committee is termed in different cities as under:

  25. ORGANIZATION The Securities Control Act, 1956 provides that a stock exchange may be: • A voluntary non-profit organization • Company limited by guarantee • Company limited by shares This Act also provides for rules and regulations for functioning of stock exchange

  26. MEMBERSHIP The membership of stock exchange is open to the citizens of India. There are eligibility criteria’s which need to be fulfilled before an individual can be given membership. The criteria are: The person should be financially sound. He shouldn’t be bankrupt, insolvent or fraudster Citizen of India The person should not be a director, partner or employee of a company which deals with securities. At least 20 years of age

  27. FEES FOR MEMBERSHIP • The membership fee is bifurcated in deposit and entrance fees. The fees are as under: • Entrance fees – Rs. 5,000 • Securities deposit – Rs. 20,000 • A person is granted membership only after a detailed enquiry is conducted. All the members are issued membership card. • Note: As per the website of BSE, the security deposit amount is now Rs.10,00,000 (Rupees Ten Lakhs only).

  28. ROLE IN CAPITAL MARKET Capital markets are financial markets for buying and selling of long term equity or debt securities. In other words, capital market may be defined as a market place where potential borrowers of long term funds are brought in contact with potential lenders. Capital market includes primary market, secondary market, financial institutions and everyone else engaged in the business of providing capital funds.

  29. ROLE IN CAPITAL MARKET [ ROLE of Stock Exchange] • ROLE IN PROMOTING CAPITAL FORMATION • ECONOMIC DEVELOPMENT • OPTIONS /FLEXIBILITY FOR INVESTMENT • SAVINGS MOBILIZATION • LIQUIDITY OF INVESTMENT • ENHANCING VALUE OF SECURITIES

  30. ROLE IN CAPITAL MARKET • ROLE IN PROMOTING CAPITAL FORMATION Stock exchange facilitates trading in secondary market. Secondary market creates the habit of saving, investing and risk taking among the investing class. They gain knowledge and get accustomed to investing in shares. Hence, they are not hesitant to invest surplus funds in primary market. The money raised through primary market is used for the production of various goods and services useful for the society. Note – Investing in primary markets will lead to capital formation. Investing in secondary would mean mere transfer of funds from one investor to another. Company does not get funds of secondary market.

  31. ROLE IN CAPITAL MARKET • OPTIONS /FLEXIBILITY FOR INVESTMENT Stock exchanges provide a wide range of investment options to investors. Investors can invest in various products like equity, debt, derivatives, commodities etc. They can also easily shift their investment from one product to another.

  32. ROLE IN CAPITAL MARKET • LIQUIDITY OF INVESTMENT Stock exchanges provide liquidity. Investors can sell any of their investments in securities at any time during trading hours. The online settlement of dematerialized securities enables the investors to receive funds within 2 working days after selling the securities.

  33. ROLE IN CAPITAL MARKET • ECONOMIC DEVELOPMENT Stock exchange facilitates effective mobilization of savings. This money is invested in national asset which leads to employment generation. Besides, funds are easily and readily available for development and expansion of companies. This results in economic development.

  34. ROLE IN CAPITAL MARKET • SAVINGS MOBILIZATION Stock exchanges provide organized market for individuals as well as institutional investors. There are proper rules and regulations to ensure investor's protection. This gives confidence even to small investors. Stock exchanges attract small savings especially of large number of investors in the capital market.

  35. ROLE IN CAPITAL MARKET • ENHANCING VALUE OF SECURITIES Getting shares listed on stock exchange helps in increasing goodwill of companies. The tag “listed company” adds to the reputation.

  36. FUNCTIONS OF STOCK EXCHANGE Stock exchange is a market place which provides organized services to trade in listed securities such as equity shares, preference shares, bonds, debentures, etc. Stock exchange facilitates buying and selling of securities. The stock exchange plays an important function in development of economy. The functions of stock exchange are as follows:

  37. FUNCTIONS OF STOCK EXCHANGE SERVES AS ECONOMIC BAROMETER PROTECTING INVESTOR’S INTEREST CAPITAL UTILIZATION ASCERTAINING FAIR VALUE OF SECURITIES INVESTMENT’S LIQUIDITY FIP-SCAM MOTIVATION TO MANAGEMENT FORMATION OF CAPITAL

  38. FUNCTIONS OF STOCK EXCHANGE Secondary market supports the primary market by creating the habit of saving and investing. It encourages saving class to invest in the securities offered in the primary market. The money raised is used for the production of various goods and services useful for the society. FORMATION OF CAPITAL

  39. FUNCTIONS OF STOCK EXCHANGE Stock exchange provides a ready market for purchase and sale of securities. It provides liquidity to the investors who can buy and sell securities at any time during the trading hours. On account of dematerialization of securities, investors can receive funds within 2 working days after selling the securities. INVESTMENT’S LIQUIDITY

  40. FUNCTIONS OF STOCK EXCHANGE The Securities Control Act, 1956 provides for protecting the interest of the investors. The stock exchange ensures that these rules and regulations are strictly followed to protect the interest of the investors. Also, the executive committee makes rules and regulations for fair dealings and investor protection. PROTECTING INVESTOR’S INTEREST

  41. FUNCTIONS OF STOCK EXCHANGE Generally, the development or maturity of stock exchange is linked to development of the economy. If a stock exchange is more developed, it can be said that the country is on the path of development. Hence, we can say that stock exchange serves as an economic barometer. SERVES AS ECONOMIC BAROMETER

  42. FUNCTIONS OF STOCK EXCHANGE Stock exchanges channelize savings of the people into industry. As a result, ideal savings of the people flow from unproductive to productive purposes. Thus, stock exchanges ensure best utilization of capital. CAPITAL UTILIZATION

  43. FUNCTIONS OF STOCK EXCHANGE Stock exchange is useful for the evaluation of securities. The prices of securities on stock exchange are determined by the forces of demand and supply. Thus, investors know the true worth of any security. These values are widely publicized through Newspaper and TV. ASCERTAINING FAIR VALUE OF SECURITIES

  44. FUNCTIONS OF STOCK EXCHANGE The prices of securities are shown as a strip at the bottom of screen (“tickr”) on various news channels like CNBC, NDTV, ET Now etc. In business newspapers, there is one full page where share prices are mentioned. ASCERTAINING FAIR VALUE OF SECURITIES

  45. FUNCTIONS OF STOCK EXCHANGE A listed company has to comply with various rules & regulations and submit various reports to stock exchange on a periodic basis. If it fails to do so, the shares of the company may get delisted. As a result, management of the company is more cautious, more transparent and they manage the company effectively. Note: Few companies whose shares have been delisted are A.P.T.Yarns Ltd, Aachal Alloys Ltd, Acme Industries Ltd etc. MOTIVATION TO MANAGEMENT

  46. BOMBAY STOCK EXCHANGE (BSE)

  47. BSE • INTRODUCTION • Bombay Stock Exchange(BSE Ltd) is the first stock exchange in Asia, established in the year 1875. It was formerly known as “The Native Share & Stock Exchange Association”. It is also the first stock exchange to be granted a permanent recognition in 1956 under the Securities Contract Regulation Act, 1956. The recognition was granted in year 1956.

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