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What is Stock Exchange ? | Definition, Functions, Features, Needs & Services

Stock Exchange
Contents :
  • Meaning & Definition of Stock Exchange.
  • Features and Functions of Stock Exchange.
  • Services of Stock Exchange.
  • Organisation and Membership of Stock Exchanges in India.
  • Needs and Objectives of National Stock Exchange in India.
  • Trading and Settlement System of National Stock Exchange.

What is Stock Exchange ?


Stock Market (also Share Market) is one important constituent of capital market. Stock Exchange is an organized market for the purchase and sale of industrial and financial security. It is convenient place where trading in securities is conducted in systematic manner i.e. as per certain rules and regulations.

Meaning of Stock Exchange


"Stock Exchange or securities market comprises all the places where buyers and sellers of stock and bonds or their representatives undertake transactions involving the sale of securities."
Stock exchanges are the important ingredients of capital market. They constitute the prime-center through which bulk of investment activities will be conducted by individual and institutional operators. They are described as the citadel of capital or fortress of finance. Various forces governing commercial investments are reflected through the stock exchanges. They facilitate safe, suitable and satisfactory mobilisation of capital required mostly by companies. Government and semi-governmental bodies also process their capital or finance raising securities through the stock exchanges.
Stock exchanges are, in short, the theatres of trading in securities and act as guage-glass of economic situation in the country.

Definitions of Stock Exchange 


Husband and Dockeray :
"Securities or stock exchange are privately organised markets which are used to facilitate trading in securities."

The Securities Contracts (Resolution) Act, 1956 :
"It is an association organisation 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."

From the above definitions, it is clear that the stock exchanges are the institutions organised for providing the necessary facilities to carry on trading or dealings in securities representing claims on capital. The securities dealt on the stock exchanges include shares and debentures issued by the companies, the Government Securities, the bonds issued by semi-government bodies, etc.


Important Features of a Stock Exchange 


1) Place for Transaction :
It make provisions of a place or places for the buyers and sellers of securities or their agents for transacting their dealings.

2) Existence of Intermediaries :
Existence of brokers and other intermediaries to assist their client investors in finalising their deals is another important feature of stock Exchange.

3) Responsive Market :
It create scope for genuine or legitimate speculation and allied transactions so as to make the market continuously responsive to the basic forces of demand and supply.

4) Regulations :
Framing of regulations to ensure transactions in such a manner as to avoid undue fluctuations in the values of securities and prevent unfair dealings.


Functions of Stock Exchanges


1) Continuous Marketability to Securities :
Stock exchanges provide continuous marketability and price continuity to the investor in respect of the securities they hold or intend to hold. Buying or selling of securities would tend to concentrate on exchanging where it is listed. They create ready and steady outlet for buying and selling of securities and thus, stimulate larger investment.

2) Proper Direction to the Flow of Capital :
Stock exchanges bring about flow of capital in appropriate directions. Stock exchanges are regarded as a very sensitive barometer of business activity. The prices quoted for different securities on the stock exchange indicate their relative profitability or popularity. Funds tend to be attracted towards securities of greater market standing and securities having no status in the market will have poor response among the investors and dealers.

3) Helps in Distribution of New Securities :
Stock exchanges help in distribution of new security issues. When the shares are already listed on the stock exchanges, they will tend to be acceptable and may fetch higher market value. Costs of underwriting such issues would be relatively less. Public response to new issues will easily manifest if they are routed through stock exchanges.

4) Ensures Safety of Funds :
Stock exchanges ensure safety of invisible funds because they have to operate under set rules which seek to check over-trading illegitimate speculation and manipulation, etc. This would strengthen the investors' confidence and stimulate larger investment in business securities.

5) Mobilisation of Savings :
Stock exchanges help in mobilisation of savings, facilitate capital formation and assist the process of economic growth. The surplus funds available with individual and institutions would not have found remunerative channels, had there been no stock exchanges.

6) Mirror of Business Cycle :
Stock exchanges mirror the phase of business cycle, that is, the changing conditions of economic weather in the country. Booms and depressions find their echoes in the dealings on the stock exchanges. Stock exchanges, thus, serve as effective agency whose operations because of their growth-orientation, would be beneficial to the community at large apart from serving the interests of the investors and the company.

Services of Stock Exchange 


A) Services to the Community :

  1. Inculcation of saving habits and facilities for capital formation.
  2. Financing economic growth through capital mobilisation.
  3. Diversification of investment on the criteria of stable and increasing yields.
  4. Providing medium of evaluation regarding the worth of different securities.
  5. Portraying the prevailing economic situation.

B) Services to Investors :

Stock exchanges are in fact a boon to the investors. They sustain their confidence by providing continuous marketing facilities. Such facilities are as under :
  1. Guidance to the investors regarding the choice of securities to be bought is provided by the trends of dealings on the stock exchange.
  2. Liquidity of securities is ensured by enabling the holders to sell them whenever they need liquid funds.
  3. Information about the value of securities is imparted to the investors throughout daily quotations of listed securities.
  4. Purchases of listed securities are less risky since listing presupposes their evaluation by stock exchange authorities.
  5. Better price for securities dealt on the stock exchange can be ensured through the sensitive and continuous operations transacted by different dealers.
  6. Undue fluctuations in security-prices are avoided by the balancing operations of speculators and hedgers.

C) Services to Companies :

Companies raising their capital through stock exchanges will find better response
to their security issues.
  1. Market for securities will be enlarged, if they are channeled through stock exchanges.
  2. The credit standing and goodwill of the company would be higher, if its securities are listed on the stock exchange.
  3. Listed securities will command quicker and better response from the investors.
  4. Market value of listed securities will tend to be higher subject to asset value of the company, its earnings, reserves and dividends. This would enhance the financial status and increase its bargaining power in any collective ventures, mergers, etc. with other companies.

Organisation of Stock Exchange in India


Growth of stock exchanges in India has been linked with the growth of joint stock companies. The passing of the Companies Act 1856 and the boom in Bombay cotton markets following Civil War in the U.S.A. (1861-65) paved the way for emergence of number of companies and during 1860-64 'share mania' developed leading to evolution of capital market in India over a hundred years ago.

NSE

1) Establishment of First Stock Exchange :
The first organised stock exchange in the country was started in Bombay in 1877 with the formation of the 'Native Share and Stock Brokers' Association in 1887. In 1894, Ahmedabad Share and Stock Brokers' Association was set up mainly to handle large blocks primarily to deal in plantations and jute mills shares. Five more were established in Lahore, Delhi, Kanpur, Nagpur and Hyderabad  By 1939, there were seven exchanges. But the prospect of speculation in the wake of Second World War led to frantic growth of a number of stock exchanges. By 1945, their number increased to 21.

2) Enactment of Securities Contracts (Regulations Act, 1956) :
Operation of too many stock exchanges was considered undesirable and their diverse rules and policies may lead to unsettled conditions resulting in perverse speculative dealings injurious to genuine investment activity. Hence, the Government of India as per the recommendations of Gorwala Committee enacted Securities Contracts (Regulation) Act in 1956 to regulate the formation, operation and trading rules of stock exchanges in the country. In terms of the number of companies listed.on, Calcutta Stock Exchange is the largest with 629 listed companies; Bombay Stock Exchange ranks second with 614 listed comparnies and Madras Stock Exchange third with 356 listed companies. Delhi Exchange had 215; Ahmedabad 131; Bangalore 73; Hyderabad 41 and Indore Exchange had 17 listed companies.

3) Main Recognised Stock Exchange :
As per the powers vested under the act in the Government, only the above eight stock exchanges are recognised. Only these eight exchanges are permitted to transact dealings in their respective areas. Their bye-laws, rules of membership, etc. have been recalled to comply with the objectives and provisions of the Securities Contracts (Regulation) Act, 1956.

4) Dealings:
Almost all the stock exchanges deal in the leading bank securities, iron and steel shares, electrical and other prominent industrials. But major operations of prominent stock exchanges are found to be in specific securities. For example, cotton textiles and bank shares are predominant in Bombay; coal, jute, tea, bank and engineering securities are more popular in Calcutta Stock Exchange, textile shares are dominant in Ahmedabad while Madras Stock Exchange abounds in plantation and textiles. Many new stock exchanges have been added at Jaipur, Kanpur, Jallundhar, Ludhiana.

Membership of the Stock Exchange


Trading in securities on any stock exchange is open to members only. Only the Members are admitted to this trading ring.

A) Who can become member and how ?
Only men of integrity and competence are admitted as members of the stock exchange. They have to buy a share if the stock exchange concerned is a corporate body having a share capital. Also he has to pay admission fee of Rs. 5,000 as entrance fee and deposit Rs. 20,000 either in cash or in approved securities. The application for membership is to be made in a prescribed form sponsored by two members of five years' standing as members. Before he is admitted as a member, the applicant is required to answer searching questions put by the governing body of the concerned stock exchange. Questions pertain to applicant's status, resources, market experience, etc. After that board decides upon accepting his application and a membership card is issued to this applicant.
As a member he is required to abide by the rules and bye-laws of the stock exchange approved by the government. He is to transact business in prescribed lots and should not indulge in unwholesome competition by underwriting the commission. In other words, he should not charge below the minimum commission laid down by the stock exchange. Members are not allowed to advertise their business but can send reports and circulars to their clients.

B) Management :
Stock exchanges are managed by governing board or council of management elected on the pattern of company directors. The governing board decides policies of operations and it is assisted by different sectional committees like listing committee, arbitration committee, defaulters committee, etc.

Examine Critically the Needs and Objectives of National Stock Exchange in India.

The National Stock Exchange was set up under the section 3 of the Securities Contracts (Regulation) Act, 1956. It began to function on 30th June, 1994 by trading in debt instrument. National Stock Exchange is a measure for healthy growth of the stock market. A national integrated stock market system is provided by the National Stock Exchange. National Stock Exchange was set up by the major financial institutions of the country who are also important participants in both debt and equity markets.

Needs of National Stock Exchange :


1) Changes and Challenges :
There are tremendous changes in the world capital market with the introduction of globalisation and liberalisation of economy. It brings multitudinous changes and challenges in the Indian capital market. Due to the lack of systematic trading system it finds difficult to cope with the growth. The need for changes in the institutions, instruments and operational methods and standards is asked by the different seminars and conferences. It was expected that the various players in the market such as mutual funds, merchant bankers, credit rating agencies, etc. should take efforts towards building up a strong and vibrant market to encourage the investors across the country. The efforts were taken by mutual funds. Due to the global changes and liberalised policies of the Government in the year 1993, there were 2,97,000 companies with paid-up capital of Rs. 97,092 cores were operating in India. Among these, there were 552 foreign companies. About 50 new foreign companies are added every year.

2) Drawbacks of Tradition Stock Exchange :
There are number of stock exchanges in Indian capital and stock market. There is tremendous growth in number of stock exchanges, listed companies market capitalisation, trading volumes and investors, etc. Though there is growth in these phenomenon, the working of the stock markets in India is not improved. The old unethical practices were adopted in the market. There are many drawbacks in the working system of Indian stock market. These drawbacks are as follows :
1) The mergers and acquisitions through malpractices,
2) Entering into unofficial transactions even before issues open up for subscription,
3) Rigging up premium on new issues,
4) Presenting excessive window addressing about the new issues,
5) Insider trading,
6) Poor investor protection,
7) Lack of protection to the interest of the small and marginal investors.

3) Lack of Redressal System :
It was known from the survey that about 80% of the investors in the stock market have serious grievances but had no system to seek redressal. The trading system is not good. It is very thin and restricted. The investors get very poor service in respect of information and advice. The number of working hours of the stock exchanges are very few. The market is closed on many days, on week days. The liquidity of the scrips is very low. The investors are not interested to invest in stock market in India. To overcome all above drawbacks one study group was constituted by the Government of India to study the stock market in India and to suggest recommendations in respect of improvement of the stock exchange market in India.

Establishment of Committee Tasks :
The committee was assigned the following task :
  • To examine the need for the establishment of new stock exchange in India.
  • To prescribe criteria for the establishment of new stock exchanges.
  • To suggest minimum requirements for infrastructure electronic requirements for new stock exchanges.
  • To make suggestions on any other matter which is relevant to the establishment of new stock exchanges.
The committee submitted its report on 30th June, 1991 to the Government of India.

Recommendations :
Its recommendations were as follows :
  • Lack of liquidity in most of the markets and the inability of the exchanges to develop a market for debt instrument.
  • Lack of infrastructure facilities like effective computerisation, office space, telecommunication system, etc.
  • An inefficient and outdated trading system.
  • An outdated settlement system which is inadequate to meet the needs of the growing volume of business.
  • There is no co-operation in the various stock exchanges. There must be a single market.

Objectives of National Stock Exchange in India :


  1. To establish equities and debt instruments.
  2. To ensure access to all investors all over India by appropriate network of communication.
  3. By using electronic trading system, a fair, efficient and transparent securities market is to be provided to investors.
  4. To introduce shorter settlement cycle and book entry settlement system.
  5. To apply current international standards of securities market.


"Trading and Settlement System of National Stock Exchange".


The trading system of the National Stock Exchange is known as NEAT (National Exchange for Automated Trading). It is a fully automated screen based trading system. It enables the members to trade simultaneously with enormous race and efficiency.

Trading and Settlement System :

This system is order driven. It conceals the identity of all parties.

1) Operation Price Time Priority :
The trading system operates on a price time priority. The orders are received on the system. They are sorted with the best priced order. The first priority is given to the best buy order matching with the best priced order. They are sorted on the basis of their receipt to the system. It means that the one that came early gets priority over the later ones.

2) Computer System :
The computer system is used for the matching of the orders. Orders are matched automatically. The computer system is transparent, objective and fair. If any order is not matched, it remains in the system. It is displayed to the whole market. It remains in the market till a fresh order comes and matches it or this order is cancelled.

3) Flexibility :
The trading system also provides tremendous flexibility to the users in terms of the kinds of orders that can be placed on the system.

4) Information :
The users are provided with the complete market information online through various inquiry facilities. The system provides the information about the total order depth for a security, the best buys and sells available in the market, the high price, the low, last traded price; etc. This helps the members to make better decisions. The information is up to date which provides the investors the knowledge of the actual position of the market before placing orders. The investors come to know about the fate of their orders as soon as they placed their orders with trading members.

5) Telecommunications Network :
The telecommunications network is the backbone of the automated trading system. Each trading member trades on National Stock Exchange through computers located at his office, which can be anywhere in India. A Corporate Hierarchy is its new feature. It gives the trading members an opportunity to set up a network of branches and exercise control on their orders.

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