A stage is a premium hunter. He does not buy or sell securities in the market. He applies for shares in the new issue market just like a genuine investor. He expects that the price of shares will soon increase and the shares can be sold for a premium. A stag, like a bull, always expects a rise in price. When he gets an allotment of his shares, he sells them thereby taking advantage of the rise in price of shares.
The stag may not be able to make any profit if the public response is not good. In that case, he may have to acquire all the shares allotted to him and sell them even at a lower price than he purchased, in which case he meets with a loss.
Advantages
Healthy and scientific speculation is always beneficial. The following are certain useful advantages related to speculation:
1. Speculation increases the liquidity and marketability of securities.
2. It reduces violent fluctuations in prices of securities.
3. It equalizes prices in different markets as the speculators influence the demand and supply of securities in different markets through their buying and selling operations.
4. The speculators bear risks of price changes.
5. Savings and credit resources are mobilized for the financing of enterprise their promotion stage. Through bank loans on securities, the speculators obtain funds and use them to purchase such speculative issues, safeguarding the banks against loss.
Thus, an intelligent and legitimate speculation helps the growth of a healthy capital market. Speculation is healthy and legitimate when it is carried on by persons who are well informed, intelligent, scrupulous, have requisite finance and carry on business strictly according to the rules and regulations of the stock exchange.
Disadvantages
Speculation has the following disadvantages:
(i) It causes violent fluctuation in the prices of securities which will increase the risk of the investors.
(ii) Loss due to unsuccessful speculation tends to discourage saving.
(iii) It sometimes damages the credit-worthiness of the company.
(iv) The management is tempted to use their inside knowledge for personal
Monday, July 27, 2009
Lame Duck.
A lame duck is a bear speculator. He finds it difficult to meet his commitments and struggles like a lame duck. This happens because of the non-availability of securities in the market which he has agreed to sell and at the same time the other party is not willing to postpone the transaction.
Bear
A bear is an operator who anticipates a fall in prices and enters into a contract to sell the shares at current prices, with the hope of buying them back at a future date when the prices fall. If the prices fall as per his expectation, the bear will buy back the shares and thus make a profit. If the price rises on the date of delivery, he will make a loss. Under such a situation, he will have to buy shares at a higher price and sell them at a lower price to fulfil his contract. He may or may not be in actual possession of these shares. The transaction may be either real or notional with settlement of differences only. This is known as short selling.
These speculators are called so because just as a bear keeps its head down, the bear speculator tends to bring down prices through his selling pressure. This is known as bear raid. A market dominated by bear speculators is known as bearish market. In India, bears are popularly known as ‘mandiwala.’
The share market usually shows a decline in prices when the bears operate and sell securities which are not in their possession. When the settlement date comes, the bear will have an option either to close the deal or carry it forward by paying the backwardation charges. If he is able to make a profit on the settlement date, it is called cover. When a bear, whose forecast has not come true, finds it difficult to meet his obligations, it is called bear squeeze. A bull is an optimist, whereas a bear is a pessimist.
These speculators are called so because just as a bear keeps its head down, the bear speculator tends to bring down prices through his selling pressure. This is known as bear raid. A market dominated by bear speculators is known as bearish market. In India, bears are popularly known as ‘mandiwala.’
The share market usually shows a decline in prices when the bears operate and sell securities which are not in their possession. When the settlement date comes, the bear will have an option either to close the deal or carry it forward by paying the backwardation charges. If he is able to make a profit on the settlement date, it is called cover. When a bear, whose forecast has not come true, finds it difficult to meet his obligations, it is called bear squeeze. A bull is an optimist, whereas a bear is a pessimist.
Bull
He is a speculator on the stock exchange who anticipates a rise in prices and enters into a contract to buy the shares at current prices with the hope of selling them at the future date when the prices rise as per his expectation. If the prices rise, he sells and makes a speculative profit. In India, the bull speculator is known as tejiwala. Just as a bull tends to keep his head upward, the bull speculator tends to be on the upper side of the market. He ‘busy long’ and creates a pressure, for prices to rise. This is known as Bull Campaign or ‘rigging the market.’ A market dominated by bulls is known as bullish market.
The usual technique followed by a bull is to buy security without taking actual delivery to sell it in the future when there is a rise in prices. The bull raises the prices in the stock market of those securities in which he deals. He is said to be on the long side of the market. If the price falls, the bull pays the difference at a loss. If the price continues to fall he may either close his deal or carry forward the deal only if he expects a rise in price in the future which will cover the contango charges which will bring him some profit.
The bulls thus influence the market to a very great extent by exercising great pressure in the stock market to raise the price of securities through bulk purchasing of securities.
Example of bull transaction. If a person asks his broker to buy 1000 shares at Rs. 10 per share, for which no immediate payment will be made, and if the price of those shares increases to Rs16 per share, he will instruct his broker to sell the shares on his behalf. The transaction may not be real. The profit made in this transaction is calculated as follows:
Sales price of 1000 shares @ Rs. 16 per share = 16,000
Purchase price of 1000 shares @ Rs. 10 per shares = 10,000
Profit = 6,000
This profit of Rs. 6000 only will be paid on the date of settlement and there will be no delivery of shares.
When a bull fails in his forecast, he is called “disappointed or disrupted bull”. If he has to wait for a long time for the market to turn to his favour, he is called “tired bull’.
The usual technique followed by a bull is to buy security without taking actual delivery to sell it in the future when there is a rise in prices. The bull raises the prices in the stock market of those securities in which he deals. He is said to be on the long side of the market. If the price falls, the bull pays the difference at a loss. If the price continues to fall he may either close his deal or carry forward the deal only if he expects a rise in price in the future which will cover the contango charges which will bring him some profit.
The bulls thus influence the market to a very great extent by exercising great pressure in the stock market to raise the price of securities through bulk purchasing of securities.
Example of bull transaction. If a person asks his broker to buy 1000 shares at Rs. 10 per share, for which no immediate payment will be made, and if the price of those shares increases to Rs16 per share, he will instruct his broker to sell the shares on his behalf. The transaction may not be real. The profit made in this transaction is calculated as follows:
Sales price of 1000 shares @ Rs. 16 per share = 16,000
Purchase price of 1000 shares @ Rs. 10 per shares = 10,000
Profit = 6,000
This profit of Rs. 6000 only will be paid on the date of settlement and there will be no delivery of shares.
When a bull fails in his forecast, he is called “disappointed or disrupted bull”. If he has to wait for a long time for the market to turn to his favour, he is called “tired bull’.
Types of Speculators
In a stock exchange, the speculators are identifies as some zoological characters such as bulls, bears, stags, and lame ducks.
Speculation
Speculation may be defined as buying thing in the hope of selling them later at a higher price, or selling things which the speculator does not possess, hoping to buy them at a lower price. Speculative operations are in the nature of futures or forward trading . It means buying and selling goods for future delivery at a price agreed in advance.
Speculation in Securities
Stock exchange is the place where the listed securities are marketed. The people who buy and sell securities will have different motives, namely, investment motive and speculative motive. There are some persons who buy securities with a view to investing their money for the purpose of getting an income or selling them for getting ready cash. Such persons are called genuine investors. But there are some people who buy securities with a hope of selling them in future at a profit or in the expectation of being able to buy them
Speculation in Securities
Stock exchange is the place where the listed securities are marketed. The people who buy and sell securities will have different motives, namely, investment motive and speculative motive. There are some persons who buy securities with a view to investing their money for the purpose of getting an income or selling them for getting ready cash. Such persons are called genuine investors. But there are some people who buy securities with a hope of selling them in future at a profit or in the expectation of being able to buy them
Odd-Lot Dealers
The standard trading unit for listed stocks is designed as a round lot which is usually a 100 shares. The off-lot dealers are members specilalising in the execution of orders for blocks of shares less than 100. They buy odd-lot which other members wish to sell to their customers and sell off-lots which others wish to buy. The price of the odd-lot is determined by the round lot transactions. The odd-lot dealer earns his profit on the difference between the price at which he busy and sells the securities. He does not depend on commission.
Security Dealers
Security dealers are specialists in buying and selling gilt-edged securities, i.e. securities issued by the Central and State Government and by statutory public bodies such as municipal corporations, improvement trusts and electricity boards. They act mainly as jobbers and are prepared to take risks inherent in the ready purchase and sale of securities to meet current requirements. The gilt-edged market is over- the-counter market.
Arbitrageur
An arbitrageur is a specialist in dealing with securities in different stock exchange centres at the same time. He makes profit from the difference in prices between the two markets. The success of an arbitrageur depends on the number of securities simultaneously listed on different stock exchanges and the availability of fast means of communication systems.
Authorised Clerks
he authorized clerks or assistants are persons authorized to transact business on behalf of their member-employers. They cannot make any bargain in their own name. They can sign on behalf of their employers only when they carry a power of attorney from them. Various stock exchanges permit their members to employ a certain number of clerks or assistants to help them in their work, who are usually, issued identity cards. While a remisier acts on behalf of the members with non-members, an authorized clerk acts on behalf of the members who have employed them with other members. In the Madras Stock Exchanges, the clerk are called ‘member assistants.’
Budliwalas
The budliwalas are the financiers operating on the securities market. They advance money by taking delivery of securities on the due date at the end of the clearing, for those who wish to carry over their purchases. They also sell securities to the market when it is short of them, by giving delivery on the due date at the end of the clearing, for those who wish to carry over their sales.
Contango and backwardation. The buyer willing to carry over the transaction has to pay the budliwala a consideration called contango. It is also known as badla charge. Similarly, the seller has to pay budla charge known as backwardation to the badliwala when the request for carry over comes from the seller. The Contango and backwardation may be paid separately or may be adjusted with the price of the securities. The badla transactions are regulated by the stock exchange and sometimes they are prohibited.
Contango and backwardation. The buyer willing to carry over the transaction has to pay the budliwala a consideration called contango. It is also known as badla charge. Similarly, the seller has to pay budla charge known as backwardation to the badliwala when the request for carry over comes from the seller. The Contango and backwardation may be paid separately or may be adjusted with the price of the securities. The badla transactions are regulated by the stock exchange and sometimes they are prohibited.
Taravaniwalas
In the London Stock Exchange, the members are rigidly divided into two classes, as brokers and jobbers. But in the Bombay Stock Exchange, the classification is not so rigid. Here, the members act either as commission brokers or as taravaniwalas. Taravaniswalas are members of the stokc exchange who transact business on their own behalf. They resemble the jobbers in the London Stock Exchange and the specialists in the New York Stock Exchange. They trade in and out of the market for small difference in price thereby providing the necessary liquidity and continuity of market in securities. They often act as brokers for the public when they do not have any business as a jobber. This helps them to sell their own securities at higher prices. When they act as brokers they can buy securities from their clients at a lower price. They often encroach upon the field of brokers and manipulate the prices of securities against the broker members. In addition, they frequently make false offers and bids and back out of the transactions that are unfavourable to them. Various committees have severely criticized these questionable practices of taravaniwalas. Now, suitable provisions have been included in the Securities Contracts (Regulation)Act, 1956. This Section 15 of the Act reads as follows:
No member of a recognized stock exchange shall in respect of any securities enter into any contract as a principal with any person other than a member of a recognized stock exchange, unless he has secured the consent or authority of such persons and disclose in the note, memorandum or agreement of sale or purchase that he is acting as a principal.
In case he intends to act as principal in a contract with a non-member, he must secure the consent or authority of such a person, and disclose in the agreement or the memorandum that he is acting as principal.
No member of a recognized stock exchange shall in respect of any securities enter into any contract as a principal with any person other than a member of a recognized stock exchange, unless he has secured the consent or authority of such persons and disclose in the note, memorandum or agreement of sale or purchase that he is acting as a principal.
In case he intends to act as principal in a contract with a non-member, he must secure the consent or authority of such a person, and disclose in the agreement or the memorandum that he is acting as principal.
Taravaniwalas
In the London Stock Exchange, the members are rigidly divided into two classes, as brokers and jobbers. But in the Bombay Stock Exchange, the classification is not so rigid. Here, the members act either as commission brokers or as taravaniwalas. Taravaniswalas are members of the stokc exchange who transact business on their own behalf. They resemble the jobbers in the London Stock Exchange and the specialists in the New York Stock Exchange. They trade in and out of the market for small difference in price thereby providing the necessary liquidity and continuity of market in securities. They often act as brokers for the public when they do not have any business as a jobber. This helps them to sell their own securities at higher prices. When they act as brokers they can buy securities from their clients at a lower price. They often encroach upon the field of brokers and manipulate the prices of securities against the broker members. In addition, they frequently make false offers and bids and back out of the transactions that are unfavourable to them. Various committees have severely criticized these questionable practices of taravaniwalas. Now, suitable provisions have been included in the Securities Contracts (Regulation)Act, 1956. This Section 15 of the Act reads as follows:
No member of a recognized stock exchange shall in respect of any securities enter into any contract as a principal with any person other than a member of a recognized stock exchange, unless he has secured the consent or authority of such persons and disclose in the note, memorandum or agreement of sale or purchase that he is acting as a principal.
In case he intends to act as principal in a contract with a non-member, he must secure the consent or authority of such a person, and disclose in the agreement or the memorandum that he is acting as principal.
No member of a recognized stock exchange shall in respect of any securities enter into any contract as a principal with any person other than a member of a recognized stock exchange, unless he has secured the consent or authority of such persons and disclose in the note, memorandum or agreement of sale or purchase that he is acting as a principal.
In case he intends to act as principal in a contract with a non-member, he must secure the consent or authority of such a person, and disclose in the agreement or the memorandum that he is acting as principal.
Remisiers
Remisiers are agents who secure business from non-members in return for a commission. They are also called ‘half-commission men’. They are sub-brokers. They are only procures of business and are not allowed to transact business on the floor of the stock exchange. Their remuneration is paid out of the commission earned from the business secured by them.
Floor Brokers
Floor broker is a person who buys and sells for other brokers on the floor of the exchange. He is an individual member who owns his own seat and receives commission on the orders executed by him. He helps other brokers when they are busy. He receives a portion of the brokerage charged by the commission agent to his customer as compensation. Such brokers are not found in the Indian Stock exchanges.
Jobbers
A jobber is an independent dealer in securities. He buys and sells securities in his own name. He is not allowed to deal with non-members directly (Table 10.2). This means that a jobber can deal either with a broker or with another jobber. He does not work on commission basis, but for a profit called ‘turn’.
Commission Broker
A large number of members devote themselves to the execution of orders received from the non-member customers. They buy and sell securities for earning commission. They act as agents for their customers and earn commission for their services. The charges or commission should not exceed the official scale of brokerage. The investing public are not permitted to buy or sell securities directly from the stock exchange but through a broker. Thus, a broker is a commission agent who transacts business in securities on behalf of the non-members. He is an independent dealer in securities. He buys and sells securities in his own name. He renders very useful services to the people who want to buy or sell securities.
Under the SEBI Act, the Central Government issued a notification on August 20, 1992, laying down rules relating to stock brokers and sub-brokers. A sub-broker is a person who acts on behalf of a stock broker as an agent or otherwise for assisting the investors in buying and selling or dealing in securities through such brokers. The rules stipulate that registration with SEBI is necessary for acting as a broker or a sub-broker.
A stock broker is expected to maintain high standards of integrity, promptness and fairness in the conduct of his business. He is expected to exercise due skill, care and diligence and to comply with statutory requirements. He should not indulge in manipulation and malpractices.
Under the SEBI Act, the Central Government issued a notification on August 20, 1992, laying down rules relating to stock brokers and sub-brokers. A sub-broker is a person who acts on behalf of a stock broker as an agent or otherwise for assisting the investors in buying and selling or dealing in securities through such brokers. The rules stipulate that registration with SEBI is necessary for acting as a broker or a sub-broker.
A stock broker is expected to maintain high standards of integrity, promptness and fairness in the conduct of his business. He is expected to exercise due skill, care and diligence and to comply with statutory requirements. He should not indulge in manipulation and malpractices.
Membership
The members and their authorized clerks alone can enter the trading floor and conduct buying and selling of securities. The eligibility criteria for membership of a stock exchange are given under Rule 8 of the Securities Contracts (Regulation) Rules, 1957. The prospective member should satisfy the following conditions. He should:
1. have completed 21 years of age;
2. be a citizen of India;
3. not be adjudicated as a bankrupt or proved to be insolvent;
4. not be convicted of an offence involving fraud or dishonesty;
5. not be engaging in any other business or employment;
6. be sponsored by tow members, of five years standing as members;
7. have at least two years of experience as an apprentice, partner, authorized assistant, authorized clerk or remisier of a member;
8. buy share in the stock exchange; and
9. pay an entrance fee of Rs. 5000 and deposit Rs.20000 either in cash or in approved securities.
The members of the stock exchange may be classified in several clearly defined groups. When the operators in a stock exchange are classified on a functional basis, they include brokers, jobbers, remisiers, authorized clerks, taravaniwalas, the odd lot dealers, the badliwalas, and the arbitrageurs. In India, the stock exchange rules, by –laws and regulations do not prescribe any functional distinction between members. However, as a matter of fact, there is a fairly defined specialization under the main categories. They are briefly described below.
1. have completed 21 years of age;
2. be a citizen of India;
3. not be adjudicated as a bankrupt or proved to be insolvent;
4. not be convicted of an offence involving fraud or dishonesty;
5. not be engaging in any other business or employment;
6. be sponsored by tow members, of five years standing as members;
7. have at least two years of experience as an apprentice, partner, authorized assistant, authorized clerk or remisier of a member;
8. buy share in the stock exchange; and
9. pay an entrance fee of Rs. 5000 and deposit Rs.20000 either in cash or in approved securities.
The members of the stock exchange may be classified in several clearly defined groups. When the operators in a stock exchange are classified on a functional basis, they include brokers, jobbers, remisiers, authorized clerks, taravaniwalas, the odd lot dealers, the badliwalas, and the arbitrageurs. In India, the stock exchange rules, by –laws and regulations do not prescribe any functional distinction between members. However, as a matter of fact, there is a fairly defined specialization under the main categories. They are briefly described below.
Recognition
The stock exchanges are to be recognized by the Government. For getting recognition, an application under the Section 3 of the Securities Contracts (Regulation) Act has to be submitted to the Government with a fee of Rs. 500. The application should be accompanied by four copies of rules and by-laws. If the stock exchange is an incorporated body, the application should be accompanied by the Memorandum and Articles of Association. The Government may make enquiries further information to be furnished relating to the application. Application for renewal should be made 3 months before expiry along with a fee of Rs. 200.
The stock exchange is granted recognition only if the Government is satisfied that, (a) its rules and by-laws conform to the conditions prescribed for ensuring fair dealings and protection to investors; (b) it would be in the interest of the trade and the public.
Of the 24 stock exchanges in India, 13 are public limited companies, eight are limited by guarantee and three are voluntary non-profit-making associations. Only eight exchanges-Bombay, Calcutta, Madras, Ahmedabad, Delhi, Hyderabad, Indore and Bangalore-have been given permanent recognition, others have to renew it every year.
The stock exchange is granted recognition only if the Government is satisfied that, (a) its rules and by-laws conform to the conditions prescribed for ensuring fair dealings and protection to investors; (b) it would be in the interest of the trade and the public.
Of the 24 stock exchanges in India, 13 are public limited companies, eight are limited by guarantee and three are voluntary non-profit-making associations. Only eight exchanges-Bombay, Calcutta, Madras, Ahmedabad, Delhi, Hyderabad, Indore and Bangalore-have been given permanent recognition, others have to renew it every year.
Organisation and Management
The organization, management, membership and functioning of stock exchanges in India are governed by the provisions of the Securities Contracts (Regulation) Act, 1956. This Act permits only recognized stock exchanges which have to function under the rules, by –laws and regulations approved by the Central Government.
At present the stock exchanges in India have one of the following organizational forms:
• Voluntary non-profit- making association
• Public limited company
• Company limited by guarantee.
A stock exchange is managed by a governing body consisting of:
1. a president,
2. a vice-president,
3. an executive director,
4. the elected directors,
5. the public representatives, and
6. the nominees of the Government(s)
The governing body is responsible for policy formulation and smooth functioning of the exchange. They have the following wide-ranging powers:
1. Elect office bearers and set up committees
2. Admit and expel members
3. Manage the properties and finance of the exchange
4. Interpret rules, by –laws and regulations of the exchange
5. Adjudicate disputes
6. Conduct the affairs of the exchange.
Major stock exchanges are managed by Executive Directors. He is a full-time employee or the exchange with substantial powers. Smaller stock exchanges are managed by Secretaries. He is also a full-time employee of the stock exchange. He attends to the day-to-day functioning of the exchange.
At present the stock exchanges in India have one of the following organizational forms:
• Voluntary non-profit- making association
• Public limited company
• Company limited by guarantee.
A stock exchange is managed by a governing body consisting of:
1. a president,
2. a vice-president,
3. an executive director,
4. the elected directors,
5. the public representatives, and
6. the nominees of the Government(s)
The governing body is responsible for policy formulation and smooth functioning of the exchange. They have the following wide-ranging powers:
1. Elect office bearers and set up committees
2. Admit and expel members
3. Manage the properties and finance of the exchange
4. Interpret rules, by –laws and regulations of the exchange
5. Adjudicate disputes
6. Conduct the affairs of the exchange.
Major stock exchanges are managed by Executive Directors. He is a full-time employee or the exchange with substantial powers. Smaller stock exchanges are managed by Secretaries. He is also a full-time employee of the stock exchange. He attends to the day-to-day functioning of the exchange.
STOCK EXCHANGE IN INDIA
Origin
The Bombay Stock Exchange (BSE) is the oldest stock exchange in India. It is more than 100 years old. It was first organised as an informal association of brokers in 1875 and later in 1887 it was formally established in Bombay as a society known as Native Share and Stock Broker’s Association. The Ahmedabad Stock Exchange (ASE) was set up in 1894. These were organised as voluntary non-profits-making associations of brokers with Trust Deed. Before 1950, the control of stock exchange was a state subject and they used to be regulated by the Bombay Securities Contracts (Control) Act of 1925. Under this Act, BSE and ASE were recognized in 1927 and 1937, respectively. During the period between the two world wars, there was a great boom in the share market, and a number of stock exchanges were established. But they could not survive long as they were not recognized under the Bombay Securities Contracts (Control) Act. By 1950, the control on securities trading became a central subject under the Indian Constitution.
A committee headed by A.D. Gorwala was appointed to study the problem of central registration for control of security trading in India. The Securities Contracts (Regulation) at was passed in 1956 according to the committee’s recommendations and public discussions. There are at present 23 recognised stock exchanges in India including the Over –the-Counter Exchange of India (OTCEI) and the National Stock Exchange (NSE). Some of them are voluntary non-profit-marking organizations while others are companies limited by guarantee. Among the recognised stock exchanges in India, Bombay, Calcutta, Madras, Delhi and Ahmedabad are the prominent ones. Table 10.1 presents a list of stock exchanges in India with some details.
The Bombay Stock Exchange (BSE) is the oldest stock exchange in India. It is more than 100 years old. It was first organised as an informal association of brokers in 1875 and later in 1887 it was formally established in Bombay as a society known as Native Share and Stock Broker’s Association. The Ahmedabad Stock Exchange (ASE) was set up in 1894. These were organised as voluntary non-profits-making associations of brokers with Trust Deed. Before 1950, the control of stock exchange was a state subject and they used to be regulated by the Bombay Securities Contracts (Control) Act of 1925. Under this Act, BSE and ASE were recognized in 1927 and 1937, respectively. During the period between the two world wars, there was a great boom in the share market, and a number of stock exchanges were established. But they could not survive long as they were not recognized under the Bombay Securities Contracts (Control) Act. By 1950, the control on securities trading became a central subject under the Indian Constitution.
A committee headed by A.D. Gorwala was appointed to study the problem of central registration for control of security trading in India. The Securities Contracts (Regulation) at was passed in 1956 according to the committee’s recommendations and public discussions. There are at present 23 recognised stock exchanges in India including the Over –the-Counter Exchange of India (OTCEI) and the National Stock Exchange (NSE). Some of them are voluntary non-profit-marking organizations while others are companies limited by guarantee. Among the recognised stock exchanges in India, Bombay, Calcutta, Madras, Delhi and Ahmedabad are the prominent ones. Table 10.1 presents a list of stock exchanges in India with some details.
FUNCTIONS OF STOCK EXCHANGE
The stock exchanges perform a number of functions useful to both the investors and the corporations. They carry out the following functions:
1. Central Trading Place. The provide a central place where the brokers and dealers regularly meet and transact business.
2. Settlement of Transaction. They provide convenient arrangements for the settlement of transactions.
3. Continuous Market. These are markets for the existing securities. These are places for the holders of securities to buy and sell their securities and for those who want to invest their savings. The stock exchange thus provides liquidity to their investment.
4. Supply of Long-term Funds. Since the securities can be negotiated and transferred through stock exchanges, it becomes possible for the companies to raise long-term funds from investors. In the stock exchange, one investor is substituted by another when a security is transacted. Therefore, the company is assured of long-term availability of funds.
5. Setting up of Rules and Regulations. Stock exchanges set up rules and regulations governing the conduct and finance of their members. It ensures that a reasonable measure of safety is provided to investors and the transactions take place under competitive conditions.
6. Evaluation of Securities. Stock exchanges help to evaluate the securities as they publish the prices of securities regularly in newspapers. They also enable the holders of securities to know the worth of their holdings at any time.
7. Control over Company Management. A Company which wants to get its shares listed in a stock exchange has to follow the rules framed by the stock exchange. Through these rules and requirements, the stock exchanges exercise some control on the management of the company.
8. Helps Capital Formation. Stock exchange helps capital formation. The publicity given by the stock exchanges about the different types of securities and their prices encourage even the disinterested persons to save and invest in securities.
9. Facilitates Speculation. Stock exchange provides facilities for speculation and enables shrewd businessmen to speculate in the market and make substantial profits.
10. Directs the Flow of Savings. A stock exchange directs the flow of savings of the community between different types of competitive investments. It also helps to meet the investment needs of entrepreneurs.
1. Central Trading Place. The provide a central place where the brokers and dealers regularly meet and transact business.
2. Settlement of Transaction. They provide convenient arrangements for the settlement of transactions.
3. Continuous Market. These are markets for the existing securities. These are places for the holders of securities to buy and sell their securities and for those who want to invest their savings. The stock exchange thus provides liquidity to their investment.
4. Supply of Long-term Funds. Since the securities can be negotiated and transferred through stock exchanges, it becomes possible for the companies to raise long-term funds from investors. In the stock exchange, one investor is substituted by another when a security is transacted. Therefore, the company is assured of long-term availability of funds.
5. Setting up of Rules and Regulations. Stock exchanges set up rules and regulations governing the conduct and finance of their members. It ensures that a reasonable measure of safety is provided to investors and the transactions take place under competitive conditions.
6. Evaluation of Securities. Stock exchanges help to evaluate the securities as they publish the prices of securities regularly in newspapers. They also enable the holders of securities to know the worth of their holdings at any time.
7. Control over Company Management. A Company which wants to get its shares listed in a stock exchange has to follow the rules framed by the stock exchange. Through these rules and requirements, the stock exchanges exercise some control on the management of the company.
8. Helps Capital Formation. Stock exchange helps capital formation. The publicity given by the stock exchanges about the different types of securities and their prices encourage even the disinterested persons to save and invest in securities.
9. Facilitates Speculation. Stock exchange provides facilities for speculation and enables shrewd businessmen to speculate in the market and make substantial profits.
10. Directs the Flow of Savings. A stock exchange directs the flow of savings of the community between different types of competitive investments. It also helps to meet the investment needs of entrepreneurs.
DEFINITION
Stock exchanges are organised marketplaces in which stocks, shares and other securities are traded by members of the exchange, acting as both agents (brokers) and principals (dealers or traders). Section 2(j) of the Securities Contracts (Regulation) Act, 1956 defines a stock exchange as: “Any body of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities.” Stock exchanges have a physical location where brokers and dealers meet to execute orders from institutional and individual investors to buy and sell securities. Here, only members are allowed to buy or sell securities. It is a market for existing, not for new,
STOCK EXCHANGE
Stock exchanges are the most important segment of the secondary market where securities are traded. Securities markets are places where securities, stocks, shares and bonds of all types are bought and sold. Here, the constantly changing forces of supply and demand set quotations for the issue of shares. The buyers and sellers meet for their mutual advantages, enjoying the facilities of a well-organised marketplace. These are highly organised markets in existence where a formal mechanism exists for bringing buyers and sellers together directly or through their representatives. They provide a central trading place at which groups of brokers and dealers meet regularly and transact business with one another for their customers and their own accounts.
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