STOCK MARKET - STOCK AND COMMODITY MARKET

Notes 18 Pages

Bengaluru City University

Bachelor of Business Administration

Contributed by

Tabeed Malpani

1

FACULTY NAME: Mrs NALINI.N
COLLEGENAME: MES INSTITUTE OF MANAGEMENT
SUB:STOCK AND COMMODITY MARKET

UNIT-2
STOCK MARKET

MEANING
Stock market is organized market where securities are traded. It includes market for shares
debentures etc.
The Indian Securities Contracts (Regulation) Act of 1956, defines Stock Exchange as, “An
association, organization or body of individuals, whether incorporated or not, established for the
purpose of assisting, regulating and controlling business in buying, selling and dealing in
securities."
History of Indian Stock Market

Indian stock market marks to be one of the oldest stock market in Asia. It dates back to the close
of 18th century when the East India Company used to transact loan securities. In the 1830s,
trading on corporate stocks and shares in Bank and Cotton presses took place in Bombay.
An informal group of 22 stockbrokers began trading under a banyan tree opposite the Town Hall
of Bombay from the mid-1850s, each investing a (then) princely amount of Rupee . Further the
brokers increased to 250. The informal group of stockbrokers organized themselves as the
BSE was shifted to an old building near the Town Hall. In 1928, the plot of land on which the
BSE building now standswas acquired, and a building was constructed and occupied in 1930.
Premchand Roychand was a leading stockbroker of that time, and he assisted in setting out
traditions, conventions, and procedures for the trading of stocks at Bombay Stock Exchange and
they are still being followed.
In 1956, the Government of India recognized the Bombay Stock Exchange as the first stock
exchange in the country under the Securities Contracts (Regulation) Act.
The most decisive period in the history of the BSE took place after 1992. In the aftermath of a
major scandal with market manipulation involving a BSE member named Harshad Mehta, shook
the stock market .Then government started National Stock Exchange (NSE), which created an
electronic marketplace. NSE started trading on 4 November 1994.
Stock Exchange provides a trading platform, where buyers and sellers can meet to transact in
securities.
Organization And Structure Of Stock exchange

The stock exchanges are the exclusive centres for trading of securities. At present, there are 23
operative stock exchanges in India. Most of the stock exchanges in the country are incorporated
as ‘Association of Persons’ of Section 25 companies under the Companies Act
Membership:

The trading platform of a stock exchange is accessible only to trading members. They play a
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significant role in the secondary market by bringing together the buyers and the sellers.
The brokers give buy/sell orders either on their own account or on behalf of clients. As these buy
and sell order matches, the trades are executed. The exchange can admit a broker as its member
only on the basis of the terms specified in the Securities Contracts (Regulation) Act, 1956, the
SEBI Act 1992, the rules, circulars, notifications, guidelines, and the byelaws, rules and
regulations of the concerned exchange. No stock broker or sub- broker is allowed to buy, sell or
deal in securities, unless he or she holds a certificate of registration from the SEBI.
Eligibility Criteria for members

 He is not less than 21 years
 He should be citizen of India
 He has not been adjudged bankrupt
 He has not compounded with creditors
 He has not convicted for an offence involving fraud and dishonesty he has not been expelled
from any other stock exchange
 The stock exchanges however are free to decide the fees
 The minimum standards are laid down by the SEBI
 The admission of trading members is based on various criteria like capital adequacy, track
record, education, and experience
 With effect from July 1, 2008 a processing fee of Rs. 11,2367 and an admission fee of Rs.
5,61,8007- is charged for taking up new membership

Features of Stock Exchange

Market for securities : Stock exchange is a market, where securities of corporate bodies,
government and semi-government bodies are bought and sold.
Deals in second hand securities : It deals with shares, debentures bonds and such securities
already issued by the companies. In short it deals with existing or second hand securities and
hence it is called secondary market.
Regulates trade in securities : Stock exchange does not buy or sell any securities on its own
account. It merely provides the necessary infrastructure and facilities for trade in securities to its
members and brokers who trade in securities. It regulates the trade activities so as to ensure free
and fair trade
Allows dealings only in listed securities : In fact, stock exchanges maintain an official list of
securities that could be purchased and sold on its floor. Securities which do not figure in the
official list of stock exchange are called unlisted securities. Such unlisted securities cannot be
traded in the stock exchange.
Transactions effected only through members : All the transactions in securities at the stock
exchange are effected only through its authorised brokers and members. Outsiders or direct
investors are not allowed to enter in the trading circles of the stock exchange. Investors have to
buy or sell the securities at the stock exchange through the authorised brokers only.
Association of persons : A stock exchange is an association of persons or body of individuals
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which may be registered or unregistered.
Recognition from Central Government : Stock exchange is an organised market. It requires
recognition from the Central Government.
Working as per rules : Buying and selling transactions in securities at the stock exchange are
governed by the rules and regulations of stock exchange as well as SEBI Guidelines. No
deviation from the rules and guidelines is allowed in any case.
Specific location : Stock exchange is a particular market place where authorised brokers come
together daily (i.e. on working days) on the floor of market called trading circles and conduct
trading activities. The prices of different securities traded are shown on electronic boards. After
the working hours market is closed. All the working of stock exchanges is conducted and
controlled through computers and electronic system.
Financial Barometers: Stock exchanges are the financial barometers and development
indicators of national economy of the country. Industrial growth and stability is reflected in the
index of stock exchange.

Functions of stock exchange

Facilitates evaluation of securities: Stock exchange is useful for the evaluation of industrial
securities. This enables investors to know the true worth of their holdings at any time.
Comparison of companies in the same industry is possible through stock exchange quotations (i.e
price list).

Encourages capital formation: Stock exchange accelerates the process of capital formation. It
creates the habit of saving, investing and risk taking among the investing class and converts their
savings into profitable investment. It acts as an instrument of capital formation. In addition, it
also acts as a channel for right (safe and profitable) investment.

Provides safety and security in dealings: Stock exchange provides safety, security and equity
(justice) in dealings as transactions are conducted as per well defined rules and regulations. The
managing body of the exchange keeps control on the members. Fraudulent practices are also
checked effectively. Due to various rules and regulations, stock exchange functions as the
custodian of funds of genuine investors.

Regulates company management:Listed companies have to comply with rules and regulations
of concerned stock exchange and work under the vigilance (i.e supervision) of stock exchange
authorities.

Facilitates public borrowing: Stock exchange serves as a platform for marketing Government
securities. It enables government to raise public debt easily and quickly.

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Provides clearing house facility: Stock exchange provides a clearing house facility to members.
It settles the transactions among the members quickly and with ease. The members have to pay
or receive only the net dues (balance amounts) because of the clearing house facility.

Facilitates healthy speculation: Healthy speculation, keeps the exchange active. Normal
speculation is not dangerous but provides more business to the exchange. However, excessive
speculation is undesirable as it is dangerous to investors & the growth of corporate sector.

Serves as Economic Barometer: Stock exchange indicates the state of health of companies and
the national economy. It acts as a barometer of the economic situation / conditions.

Facilitates Bank Lending: Banks easily know the prices of quoted securities. They offer loans
to customers against corporate securities. This gives convenience to the owners of securities.

Provides liquidity to investement :Stock exchange provides liquidity (i.e eas convertibility to
cash) to investment in securities. An investor can sell his securities at any time because of the
ready market provided by the stock exchange. Stock exchange provides easy marketability to
corporate securities.
Provides collateral value to securities : Stock exchange provides bettevalue to securities as
collateral for a loan. This facilitates borrowing from a bank against securities on easy terms.
Offers opportunity to participate in the industrial growth : Stock exchange provides capital for
industrial growth. It enables an investor to participate in the industrial development of the
country.
Estimates the worth of securities : Stock exchange provides the facility of knowing the
worth(i.e true market value) of investment due to quotations (i.e price list) and reports published
regularly by the exchange. This type of information guides investors as regards their future
investments. They can purchase or sell securities as per the price trends (i.e latest price value) in
the market.
Offers safety in corporate investment : An investor can invest his surplus money (i.e extra
money) in the listed securities with reasonable safety. The risk in such investment is reduced
considerably due to the supervision of stock exchange authorities on listed companies. Moreover,
securities are listed only when the exchange authorities are satisfied as regards legality and
solvency of company concerned. Such scrutiny (detailed checking) avoids listing, of securities of
unsound companies (i.e. companies with bad financial status).
Continuous and ready market for securities: Stock exchange provides a ready and continuous
market for purchase and sale of securities. It provides ready outlet for buying and selling of
securities. Stock exchange also acts as an outlet/counter for the sale of listed securities.
Procedure for dealing in stock exchange

 Selection of broker: Customer will select the broker from whom purchase or sale is to be made.
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 Placing the order: Client places order for the purchase or sale of security in stock exchange on
behalf of client
 Making the contract: On trading floor authorized brokers will express the intention to buy or sell
the shares: traditionally it happened through out cry method and both the parties will agree in
price.
 Contract note: Buying and selling brokers will prepare contract notes after their mutual consent
 Settlement:Spot dealings are settled in full selling broker will transfer the share to buying broker
in return of money

ONLINE TRADING

Online trading refers to facility provided to investor which enables him to buy and sell shares
using internet trading platform.
Requirements for online trading
 Demat account- account where shares are kept in electronic form. Demat account can open
through stock broker(depository participant)
 Trading account- it is opened with broker who provides trading account number for ding trading
of shares
 Bank account- money transaction in each trading account will happen through bankaccount
linked to each trading account

The advantages of online trading:


You have the ability to manage your own stock portfolios


You will have more control and flexibility over the types of transaction you choose to
conduct


The commission costs for trading are significantly less money than using the services of
a professional broker


You can get access to lower fee mutual fund investments


Online brokerage firms tend to offer their clients a slew of tools included real-time Level
2 stock quotes, news, financial tools and graphs to help you do research


Some online brokerages will provide their clients to free access to high quality research
reports created by Standard and Poor and other predominate financial players


Online account investors have access to their accounts 24/7 – although market hours
(trading hours) are from 9:30am to 4pm


As long as you have access to a computer and the internet, you can take steps to
manage your finances wherever you may be

Disadvantages of online trading

 Investors, who are trading for the first time, go with the flow and get immersed in technology and
actually temporarily forget that they are actually using their real money.
 There is no relationship that of a mentor between a professional broker and an online trading
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account holder, thus leaving the investor on his own to make choices of the right shares.
 Users who are not familiar with the ins and outs of the basics of brokerage software can make
mistakes which can prove to be a costly affair.
 An investor may sometimes incur huge losses slow internet speed and network outages.

SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)

Securities Exchange Board of India (SEBI) was set up in 1988 to regulate the functions of
securities market. SEBI promotes orderly and healthy development in the stock market
in May 1992, SEBI was granted legal status. SEBI is a body corporate having a separate legal
existence and perpetual succession.

Reasons for Establishment of SEBI:
With the growth in the dealings of stock markets, lot of malpractices also started in stock
markets such as price rigging, ‘unofficial premium on new issue, and delay in delivery of shares,
violation of rules and regulations of stock exchange and listing requirements. Due to these
malpractices the customers started losing confidence and faith in the stock exchange. So
government of India decided to set up an agency or regulatory body known as Securities
Exchange Board of India (SEBI)
Objectives of SEBI:

The overall objectives of SEBI are to protect the interest of investors and to promote the
development of stock exchange and to regulate the activities of stock market. The objectives of
SEBI are:
 To regulate the activities of stock exchange.
 To protect the rights of investors and ensuring safety to their investment.
 To prevent fraudulent and malpractices by having balance between self regulation of business
and its statutory regulations.
 To regulate and develop a code of conduct for intermediaries such as brokers, underwriters, etc.

Features of SEBI

1. The SEBI shall be a body corporate established under SEBI ACT, with perpetual succession and
a common seal.
2. The head office of the board shall be at Mumbai. SEBI can have branch offices at other places in
India.
3. The board shall consist of the following members. (i)A chairman
4. Two members from amongst the officials of the Ministries of the Central Government dealing
with finance and law.
5. One member from amongst the officials of the Reserve Bank of India.

6. Two other members - Chairman and other members of the Board are appointed by the central
Government.
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7. The general superintendence, direction and management of the SEBI shall vest in the Board of
members. Those members exercise all powers and do all acts and things which may be exercised
by the Board (SEBI)
8. Central Government shall have the power to remove a member or the chairman appointed to the
Board
9. Central government shall provide finance and also make appropriate grants to the Board.
10. Central government has power to issue direction to the board on the policy matters and shall
super cede the board in the event of default by the Board.
Functions of SEBI:

The SEBI performs functions to meet its objectives. To meet three objectives SEBI has three
important functions. These are:
 Protective functions
 Developmental functions
 Regulatory functions.

Protective Functions:

These functions are performed by SEBI to protect the interest of investor and provide safety of
investment.
As protective functions SEBI performs following functions:
It Checks Price Rigging: Price rigging refers to manipulating the prices of securities with the
main objective of inflating or depressing the market price of securities. SEBI prohibits such
practice because this can defraud and cheat the investors.
It Prohibits Insider trading: Insider is any person connected with the company such as
directors, promoters etc. These insiders have sensitive information which affects the prices of the
securities. This information is not available to people at large but the insiders get this privileged
information by working inside the company and if they use this information to make profit, then
it is known as insider trading, e.g., the directors of a company may know that company will issue
Bonus shares to its shareholders at the end of year and they purchase shares from market to make
profit with bonus issue. This is known as insider trading. SEBI keeps a strict check when insiders
are buying securities of the company and takes strict action on insider trading.
SEBI prohibits fraudulent and Unfair Trade Practices: SEBI does not allow the companies to
make misleading statements which are likely to induce the sale or purchase of securities by any
other person.
SEBI undertakes steps to educate investors so that they are able to evaluate the securities of
various companies and select the most profitable securities.
SEBI promotes fair practices and code of conduct in security market by taking following
steps:
 SEBI has issued guidelines to protect the interest of debenture-holders wherein companies
cannot change terms in midterm.
 SEBI is empowered to investigate cases of insider trading and has provisions for stiff fine and
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imprisonment.
 SEBI has stopped the practice of making preferential allotment of shares unrelated to market
prices.

Developmental Functions:

These functions are performed by the SEBI to promote and develop activities in stock exchange
and increase the business in stock exchange. Under developmental categories following
functions are performed by SEBI:
 SEBI promotes training of intermediaries of the securities market.
 SEBI tries to promote activities of stock exchange by adopting flexible and adoptable
approach in following way:
 SEBI has permitted internet trading through registered stock brokers.
 SEBI has made underwriting optional to reduce the cost of issue.
 Even initial public offer of primary market is permitted through stock exchange.

Regulatory Functions:

These functions are performed by SEBI to regulate the business in stock exchange. To regulate
the activities of stock exchange following functions are performed:
 SEBI has framed rules and regulations and a code of conduct to regulate the intermediaries
such as merchant bankers, brokers, underwriters, etc.
 These intermediaries have been brought under the regulatory purview and private placement
has been made more restrictive.
 SEBI registers and regulates the working of stock brokers, sub-brokers, share transfer agents,
trustees, merchant bankers and all those who are associated with stock exchange in any
manner.
 SEBI registers and regulates the working of mutual funds etc.
 SEBI regulates takeover of the companies.
 SEBI conducts inquiries and audit of stock exchanges.
Organisational Structure
The Organisational Structure of SEBI:
 SEBI is working as a corporate sector.
 Its activities are divided into five departments. Each department is headed by an executive
director.
 The head office of SEBI is in Mumbai and it has branch office in Kolkata, Chennai and
Delhi.
 SEBI has formed two advisory committees to deal with primary and secondary markets.
 These committees consist of market players, investors associations and eminent persons.

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Objectives of the two Committees are:

 To advise SEBI to regulate intermediaries.

 To advise SEBI on issue of securities in primary market.

 To advise SEBI on disclosure requirements of companies.

 To advise for changes in legal framework and to make stock exchange more transparent.

 To advise on matters related to regulation and development of secondary stock exchange.
 These committees can only advise SEBI but they cannot force SEBI to take action on
their advice.
SEBI’s powers in relation to stock exchanges

The SEBI ordinance has given it the following powers:
1. It may call periodical returns from stock exchanges.
2. It has the power to prescribe maintenance of certain documents by the stock exchanges.

3. SEBI may call upon the exchange or any member to furnish explanation or information
relating to the affairs of the stock exchange or any members.
4. It has the power to approve bye-law of the stock exchange for regulation and control of
the contracts.
5. It can amend bye-laws of stock exchange.
6. In certain areas it can grant to license the dealers in securities.
7. It can compel a public company to list its shares. Securities Contract (Regulation) Act
empowers Central Government to delegate some of its powers, to SEBI.
They are as follows:
 Power to grant recognition to a stock exchange.
 Power to direct any stock exchange to amend the rules relating to constitution of stock
exchange, admission of new members, etc.
 Power to supersede governing body of any stock exchange.
 Power to suspend business of a recognised stock exchange.
 Power to prohibit contracts in certain cases

Bombay Stock Exchange (BSE),
BSE is a stock exchange located on Dalal Street, Mumbai, Maharashtra, India. It was was
established as "The Native Share & Stock Brokers' Association" in 1875. It is the11th largest
stock exchange in the world by market capitalisation as on 31 December 2012.Established in
1875. . Over the past 137 years, BSE has facilitated the growth of the Indian corporate sector by
providing it an efficient capital-raising platform.. More than 5000 companies are listed on BSE
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making it world's No. 1 exchange in terms of listed members. The companies listed on BSE Ltd
command a total market capitalization of USD Trillion 1.32 as of January 2013. BSE Ltd is
world's fifth most active exchange in terms of number of transactions handled through its
electronic trading system. It is also one of the world’s leading exchanges (3rd largest in
December 2012) for Index options trading BSE also provides a host of other services to capital
market participants including risk management, clearing, settlement, market data services and
BSE provides trading facilities through BOLT (BSEOn-Line trading System ) BSE’s trading
session starts from 9 am – 15.30 pm (Monday to Fri-day).
BSE provides depository services
through its Central Depository Services Ltd. (CDSL) BSE’s popular equity index - the S&P BSE
SENSEX [Formerly SENSEX ] - is India's most widely tracked stock market benchmark index.

THE NATIONAL STOCK EXCHANGE (NSE)

NSE islocated in Mumbai, India. National Stock Exchange (NSE) was established in the mid
1990s as a demutualized electronic exchange. NSE provides a modern, fully automated screen-
based trading system, with over two lakh trading terminals, through which investors in every
nook and corner of India can trade. NSE has played a critical role in reforming the Indian
securities market and in bringing unparalleled transparency, efficiency and market integrity.
NSE has a market capitalisation of more than US$989 billion and 1,635 companies listed as on
July 2013. Though a number of other exchanges exist, NSE and the Bombay Stock Exchange are
the two most significant stock exchanges in India, and between them are responsible for the vast
majority of share transactions. NSE operates on the 'National Exchange for Automated Trading'
(NEAT) system. NSE's flagship index, the CNX NIFTY 50, is used extensively by investors in
India and around the world to take exposure to the Indian equities market.

Objectives of NSE:
 Establishing a nationwide trading facility for all types of securities,
 Ensuring equal access to all investors all over the country through an appropriate
communication network, providing a fair, efficient and transparent securities market using
electronic trading system.
 Enabling shorter settlement cycles and book entry settlements and meeting the international
benchmarks and standards.

Listing means admission of securities of an issuer to trading privileges (dealings) on a stock
exchange through a formal agreement. The prime objective of admission to dealings on the
exchange is to provide liquidity and marketability to securities, as also to provide a mechanism
for effective control and supervision of trading.

At the time of listing securities of a company on a stock exchange, the company is required to
enter into a listing agreement with the exchange. The listing agreement specifies the terms and
conditions of listing and the disclosures that shall be made by a company on a continuous basis to
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STOCK MARKET - STOCK AND COMMODITY MARKET

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