Stock Market

Security Market and Stock Exchange-

Stock Exchange

• A stock exchange is an establishment that offers a venue for the purchase and sale of already existing securities.

• According to 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 and selling or dealing in securities.

Functions of a Stock Exchange

• Provides ready and continuous market.

• Helps in mobilization of savings and capital formation.

• Providing Liquidity and Marketability to Existing Securities.

• It helps in Attracting the foreign investments.

• As a result of stock market transactions, funds flow from the less profitable to more profitable enterprises helping in better allocation of Funds.

• The membership and transactions of a stock exchange are carefully regulated, ensuring effective and secure economic transactions.

Benefits of stock exchanges

A.To the Companies-

• It helps in building trust among investors for the companies listed in stock exchanges.

• Helps in diversified investment in the company.

• It helps in raising capital for the company.

B.To the Investors-

• It makes easy to buy and sell securities.

• Helps them to raise loans from securities purchased by them.

• It helps them to make profit by efficiently investing in the companies.

• It helps to bring transparency to investor by providing organized financial system.

Dematerialisation in Sock market

Dematerialisation

• All trading in securities is now done through computer terminals. Since all systems are computerised, buying and selling of securities are settled through an electronic book entry formand this is called Dematerialisation

Demat Account-

• A demat account, which is an abbreviation for dematerialized account, is a type of account that enables individuals to hold company shares and securities in electronic form.

Stock Depositories

Depositories-

• Just like a bank keeps money in safe custody for customers, a depository also is like a bank and keeps securities in electronic form on behalf of the investor and these are known as depositories

1.National Securities Depository Limited (NSDL)

• The National Securities Depository Limited (NSDL) is a central securities depository located in Mumbai, India.
• NSDL was established in August 1996 as the first electronic securities depository in India with national coverage.
• It was promoted as a joint venture of the IDBI, UTI, and the National Stock Exchange.

2.The Central Depository Services Limited (CDSL)

• It was founded in 1999.

• It is 2^nd depository in India.

• It was promoted by the Bombay Stock Exchange and the Bank of India.

Stock Exchanges in India

History of Stock Exchanges-

• The first organized stock exchange in India was established in 1875 in Bombay, making it the oldest in Asia.
• The Ahmedabad Stock Exchange was founded in 1894.
• In 1908, the Calcutta Stock Exchange was established to facilitate the trading of shares in plantations and jute mills.
• The Madras Stock Exchange was created in 1920.

Over The Counter Exchange of India (OTCEI)-

• It was also promoted by the financial institutions like UTI, ICICI, IDBI, Business Studies IFCI, LIC etc. in September 1992 specially to cater to small and medium sized companies

At present there are 24 stock exchanges in the country

Most important of them are as follows-

1.National Stock Exchange of India(NSE)-

• It is located in Mumbai , Maharashtra.

• It was incorporated in 1992 and was recognized as a stock exchange in April 1993 and started operations in 1994.

• The National Stock Exchange (NSE) was established by prominent financial institutions, banks, insurance companies, and other financial intermediaries.
• NSE has two indices, a 50 share index, and a 500 share index, which are known as S&P CNX-50 (Nifty Fifty) and S&P CNX-500, respectively.
• The exchange is managed by professionals who do not engage in direct or indirect trading on the exchange.

2.Bombay Stock Exchange (BSE)

• It was established in 1875(was established as the Native Share Stock Brokers Association ) by cotton merchant Premchand Roychand, a Jain businessman.

• It is the oldest stock exchange in Asia.

• It was granted permanent recognition under the Securities Contract (Regulation) Act, 1956.

• There are at present following indices connected with the BSE:

Different stock Indices

1.Sensex-

• The sensitive index is a 30 stocks index of the BSE  This index represents the Indian stock market.

2.BSE-200- 

• The BSE has a stock share index consisting of 200 stocks, which includes the 30 stocks of the Sensex. Additionally, there is a dollar-denominated version of the index called the Dollex.

3.BSE-500-

• It is a 500-stock index representing major industries and many sub-sectors of the economy

4.National Index- 

• It is an index of 100 stocks being quoted nationwide (Bombay, Delhi, Kolkata, etc.)The 30 stocks of the sensex are included in the National Index.

Regulation of Stock exchanges-

For regulation of security market in India ,government introduced a new body called SEBI

Securities Exchange Board of India (SEBI)

• The Securities and Exchange Board of India (SEBI) was founded by the Government of India on 12 April 1988.
• In order to give the SEBI a statutory status, an ordinance was passed on 30 January 1992.
• The aforementioned ordinance was subsequently substituted by the Securities and Exchange Board of India Act, 1992, which was enacted by the Indian Parliament.

• Its Head quarter is located in Mumbai.

• It is a quasi-legislative and quasi-judicial body.

• SEBI have different roles like Regulatory function ,Developmental function and Protective functions in the financial market.

Some of its functions and role are as follows-

• Ensuring the proper functioning and supervision of businesses operating within stock exchanges and other securities markets.

• Promoting and regulating self regulatory organizations.

• Promoting investors education and training of intermediaries.

• Registration of brokers and subbrokers and other players in the market.

• Prohibition of fraudulent and unfair trade practices like making misleading statements, manipulations, price rigging etc.

The Organization Structure of SEBI

• The Board of the Securities and Exchange Board of India comprises a Chairperson, as well as numerous full-time and part-time members.

• There are different advisory committees of SEBI to advice on different financial matters’

Securities Appellate Tribunal (SAT) 

• The Securities and Exchange Board of India Act, 1992 created SAT as a legal entity.
• SAT's role is to handle and resolve appeals relating to decisions made by the Securities and Exchange Board of India or by an adjudicating officer under the Act.
• Additionally, SAT has the power to exercise jurisdiction, powers, and authority granted to it by this Act or any other law currently in effect.

The spot market or cash market

• The spot market, also known as the cash market, is a financial marketplace where commodities or financial instruments are traded for immediate delivery.
• In contrast to the futures market, which involves delivery at a later date, the spot market is for immediate delivery.
• Spot exchanges in India are electronic trading platforms that enable the buying and selling of specified commodities, such as metals, bullion, and agricultural commodities
• These spot exchanges offer spot delivery contracts for these commodities, allowing buyers and sellers to exchange the commodity immediately upon the completion of the transaction.

Advantages of Spot Exchanges

• It can lead to efficient price determination as price is determined by a wider cross-section of people from across the country.

• This also ensures transparency in price discovery.

• Anonymity ensures convergence of different price perceptions,as the buyer or seller merely expresses their desire to trade without even meeting directly.

• The participation of farmers, traders, and processors from across the country in spot exchanges can eliminate the risk of cartelization and other unfavorable practices that exist in commodity markets.

• Bank finance available against the goods in the warehouse on easier terms improves holding capacity.

• Since the trades are guaranteed, counter party risk is avoided.

Spot Exchanges in India

1.The National Spot Exchange Ltd (NSEL)-

• The National Spot Exchange Limited (NSEL) is a commodity spot exchange operating at the national level.
• The promotion of the entity in question was carried out jointly by Financial Technologies (India) Ltd (FTIL) and the National Agricultural Cooperative Marketing Federation of India Limited (NAFED).
• Live trading on the exchange commenced on October 15, 2008.

2.NCDEX Spot Exchange Limited-

• It was established in October 2006

3.Reliance Spot Exchange Limited

4.Indian Bullion Spot Exchange limited 

OTC-Over The Counter Market

• In the OTC trades are based on contracts made directly between two parties, and not subject to the rules of an exchange. 

Financial Stability Development Council (FSDC)

• It was set up in 2010 To strengthen and institutionalize the mechanism for maintaining financial stability.

Chairman-

• The council is chaired by the Finance Minister.

Members-

• It includes heads of financial-sector regulatory authorities, the Finance Secretary and/ or Secretary of the Department of Economic Affairs, Secretary of the Department of Financial Services, and the Chief Economic Adviser as members.

Important terms of stock markets

Asset Management

• The function of managing assets on behalf of a customer, usually for a fee.

Asset Management Company

• The company which handles the day to day operations and investment decisions of a unit trust.

Badla

• Carrying forward of transactions from one settlement period to another without effective delivery.

• This is permitted only in specified securities and is done at the making up price which is usually the closing price of the last day of settlement.

Bancassurance

• The phenomenon whereby a financial institution combines the selling of banking products and insurance products through the same distribution channel

Bear

• A pessimist market operator who expects the market price of shares to decline. The term also refers 8 to the one who has sold shares which he does not possess, in the hope of buying them back at a lower price, when the market price of the shares come down in the near future.

Bear Hug

• A variety of takeover strategy that seeks to hurry target company managements to recommend acceptance of a tender offer in a short period of time.

Bear Market

• A weak or falling market characterized by the dominance of sellers.

Beta

• A measure of the volatility of a stock relative to the market index in which the stock is included. A low beta indicates relatively low risk; a high beta indicates a high risk.

Blow Out

• A security offering that sells out almost immediately.

Blue Chip

• The best rated shares with the highest status as investment based on return, yield, safety, marketability and liquidity.

Bull

• A market player who believes prices will rise and would, therefore, purchase a financial instrument with a view to selling it at a higher price. Opposite of a bear.

Bull Market

• A rising market with abundance of buyers and relatively few sellers.

Dirty Float

• A floating security whose value is not solely determined by free market supply and demand pressures but also by interventions of the concerned authorities

Face Value

• The value that appears on the face of the scrip, same as nominal or par value of share/debentures.

Gilt Edged

• A term used to describe a bond, generally issued by the Government or issued with a Government Guarantee so much so that there are no doubts about the ability of the issuer to pay regular interest and the principal amount to the bond holders.

Important one Liner Questions and answers on Stock Exchange in India.

What is a stock exchange?

A place where existing securities are bought and sold.

What is the definition of a stock exchange according to the Securities Contracts (Regulation) Act 1956?

A body that regulates and controls the buying and selling of securities.

What are the functions of a stock exchange?

Providing a ready and continuous market, mobilizing savings and capital formation, providing liquidity and marketability to existing securities, attracting foreign investments, and facilitating better allocation of funds.

How does a stock exchange benefit companies?

Building trust among investors, helping with diversified investment, and raising capital for the company.

What are the benefits of a stock exchange for investors?

Easy buying and selling of securities, raising loans from securities purchased, making profits by efficiently investing, and transparency through an organized financial system.

What is dematerialization?

Settling buying and selling of securities through electronic book entry forms.

What is a demat account?

An account that enables individuals to hold company shares and securities in electronic form.

What are stock depositories?

Institutions that keep securities in electronic form on behalf of the investor.

What is the National Securities Depository Limited (NSDL)?

A central securities depository located in Mumbai, India, established in August 1996.

Who promoted NSDL?

The IDBI, UTI, and the National Stock Exchange.

What is the Central Depository Services Limited (CDSL)?

The second depository in India, promoted by the Bombay Stock Exchange and the Bank of India.

What is the history of stock exchanges in India?

The first stock exchange in India was established in 1875 in Bombay, followed by the Ahmedabad Stock Exchange in 1894, the Calcutta Stock Exchange in 1908, and the Madras Stock Exchange in 1920.

What is the Over The Counter Exchange of India (OTCEI)?

A stock exchange promoted by financial institutions to cater to small and medium-sized companies.

How many stock exchanges are currently in India?

There are 24 stock exchanges in India.

What is the National Stock Exchange of India (NSE)?

An exchange located in Mumbai, Maharashtra, recognized as a stock exchange in April 1993 and started operations in 1994, with a 50-share index, and a 500-share index.

Who established the National Stock Exchange of India (NSE)?

Prominent financial institutions, banks, insurance companies, and other financial intermediaries.

What is the Bombay Stock Exchange (BSE)?

The oldest stock exchange in Asia, established in 1875 by cotton merchant Premchand Roychand, a Jain businessman.

What is Sensex?

A 30-stock index of the BSE that represents the Indian stock market.

What is SEBI?

The Securities and Exchange Board of India (SEBI) is a regulatory body founded by the Government of India on 12 April 1988.

When was the Securities and Exchange Board of India Act, 1992 enacted?

After an ordinance was passed on 30 January 1992, which gave the SEBI statutory status.