FUNCTIONS OF STOCK EXCHANGE IN INDIA

PREPARED BY: ARPIT SHAH SYBBI 26

What is a stock exchange?

A stock exchange is a corporation or mutual organisation which provides "trading" facilities for stock brokers to trade in stocks and other securities. The securities traded on a stock exchange include: shares issued by companies, unit trusts, derivatives, pooled investment products and bonds. Simply put, stock exchanges are open markets that trade in financial assets. Whether associated with a company or acting as an individual, a stock exchange is the place where stocks are bought and sold. There are a number of major stock exchanges around the world and each of these plays a part in determining the overall economic condition.
A stock exchange provides services for stock brokers and traders to trade stocks, bonds, and other securities. Stock exchanges also provide facilities for issue and redemption of securities and other financial instruments, and capital events including the payment of income and dividends. Securities traded on a stock exchange include shares issued by companies, unit trusts, derivatives, pooled investment products and bonds.

It is said that to be really successful in life, you need to have your fundamentals strong. For example, how many investors who play the markets regularly actually know what a stock exchange is, how did it come into being and its importance?

Everyday, stocks are exchanged and traded in numerous stock markets around the world. The liquidity they bring are a vital component of economic growth. However, we seldom stop and think about the vital role that a stock exchange plays. This article will try to provide such basic information for your perusal.

Stock Exchanges in India

A Stock Exchange is the place where investors go to buy/sell their shares. Once a company's public offering is complete, it gets listed in a stock exchange. After listing it would be available for trading to all investors in the stock exachanges where they are listed. In India we have two major stock exchanges. They are: 1. The National Stock Exchange (NSE) & 2. The Bombay Stock Exchanges (BSE)

National Stock Exchange:

The NSE is India's largest and the worlds third largest stock exchange in terms of Transaction volumes & amounts. The NSE is based out of Bombay. The NSE has set up its trading platform as a nation-wide, fully automated screen based system. This enables anyone in any part of the country to trade on shares listed in the NSE. The NSE is based on a demutualized model wherein the ownership, management & trading rights are managed by three different group of people. This is to ensure that there is no conflict of interest among the stake holders.

NSE Index or NIFTY:

The NSE Index or the Nifty Index as it is popularly known, is the index of the performance of the 50 largest & most profitable, popular companies listed in the index. Each company that is part of the index has its own weightage in the value of the Index. The value of the Nifty Index is the weighted average of the prices of these 50 companies.

Indices

Graph of S&P CNX Nifty from January 1997 to March 2011

NSE also set up as index services firm known as India Index Services & Products Limited (IISL) and has [14] launched several stock indices, including: S&P CNX Nifty(Standard & Poor's CRISIL NSE Index) CNX Nifty Junior CNX 100 (= S&P CNX Nifty + CNX Nifty Junior) S&P CNX 500 (= CNX 100 + 400 major players across 72 industries) CNX Midcap

Bombay Stock Exchange:

The BSE is the oldest stock exchange in Asia. It is situated in Dalal Street in Mumbai. It is the third largest stock exchange in south Asia and the tenth largest in the world. BSE has over 5000 companies that are listed in it. The objectives of the BSE are similar to that of the NSE. BSE also uses the latest technologies in the IT field to provide a single place where traders from across the world can buy/sell shares in the Indian share market. BSE Index or SENSEX: The BSE Index or the Sensex as it is popularly known, is the index of the performance of the 30 largest & most profitable, popular companies listed in the index. Each company that is part of the index has its own weight age in the value of the Index. Since the number of companies is lesser, the index variations are higher when compared to the Nifty index.

Indices

The graph of SENSEX from July 1997 to March 2011

The launch of SENSEX in 1986 was later followed up in January 1989 by introduction of BSE National Index (Base: 1983-84 = 100). It comprised 100 stocks listed at five major stock exchanges in India Mumbai, Calcutta, Delhi, Ahmedabad and Madras. The BSE National Index was renamed BSE-100 Index from October 14, 1996 and since then, it is being calculated taking into consideration only the prices of stocks listed at BSE. BSE launched the dollar-linked version of BSE-100 index on May 22, 2006. BSE launched two new index series on 27 May 1994: The 'BSE-200' and the 'DOLLEX-200'. BSE-500 Index and 5sectorll indices were launched in 1999. In 2001, BSE launched BSE-PSU Index, DOLLEX-30 and the country's first free-float based index - the BSE TEC Index. Over the years, BSE shifted all its indices to the free-float methodology (except BSE-PSU index). BSE disseminates information on the Price-Earnings Ratio, the Price to Book Value Ratio and the Dividend Yield Percentage on day-to-day basis of all its major indices. The values of all BSE indices are updated on real time basis during market hours and displayed through the BOLT system, BSE website and news wire agencies. SENSEX is significantly correlated with the stock indices of other emerging market.

INDIAN STOCK EXCHANGE

Stock Exchange is an entity provides trading facilities for stock brokers on behalf of Investors and traders to trade stocks and other securities. The products traded on a "stock exchange" include stocks (shares), derivatives (futures and options), currency (Forex), other financial instruments and investment bonds. In simple words, transfer the ownership of "Shares" from Seller to Buyer. The term "bourse" came from the Latin bursa meaning a bag.

About Meaning of Stock Exchange is a central location for trading record keeping , modern markets keep the records in electronic mode. Now "Technology" increased speed and reduced cost of transactions. Trade on floor is by trading members only. The initial public offering of stocks to investors is by definition done in the primary market and subsequent trading is done in the secondary market in bourse. A stock exchange is often the most important component of a stock market system. Usually no compulsion to issue stock via the exchange or regular trading, such trading is said to be off exchange or over-the-counter, exchanges are part of a world market for securities.

Types
Structure may divided based on trading options. Currency traded types is "Forex", forward contracts are called Future exchanges, commodity exchanges offers commodity trading.

Ownership
Stock exchanges originally owned by group of entities like government bodies, Financial institutions, member stock brokers and mutual organizations. In this way the mutual organization becomes a corporation, with shares listed on a stock exchange.

Role: Capital Raising

Provide facility to raise capital for business expansion through selling of shares to the investing public or private.

Savings in stocks investment

When people savings and invest in shares, it leads to rational allocation of resources into funds and various developmental projects, reduce idle deposits with banks, are mobilized to promote business activity with benefits for several economic sectors such as infrastructure, agriculture, commerce and industry leads stronger economic growth and higher productivity.

Company Growth
Companies stake acquisitions as an opportunity, hedge against volatility, increase its market share and other necessary business assets. A merger or takeover through the "Stock Market" is one of the simplest and transparent.

Profit share
Professional stock investors get benefit through dividends and stock price appreciation that may result in capital gains and investment opportunities for small investors

Corporate governance
Generally improve their management financial standards and efficiency in order to satisfy the demands of shareholders and public corporations by public exchanges and the government. According to regulations perfect management of records than privately held companies. When poor financial or managerial records are known by the equity investors, the share leads to lose value.

Functions:
It is an open market for the buying and selling of financial assets. General public can take part in the sale and purchase of securities of different companies. Stock exchange provides information about the change in prices of various securities. It also provides information about the overall economic conditions of the country. Stock exchange works as an indicator of the economy. If the business in stock exchange market is going well, it shows that the economic conditions of the country are good and vice versa. Stock exchange is a market where buyers and sellers of securities come together. Due to this stock exchange play the role of an intermediary. It provides the facility of speculation to the speculators. Speculation is a way by which demand and supplies of the securities are adjusted. It provides the facility of capital formation to the listed companies, because it is a place where the people come and invest their surplus funds.

What is the role of a stock exchange that makes it vital to an economy?

The main function of a stock exchange is to facilitate the transactions associated with both buying and selling of securities. Buyers and sellers of shares and stocks can track the price changes of securities from the stock markets (derivatives, equity etc.) in which they operate. Also, stock exchanges have multiple roles in an economy which make it vital. These roles include:

Raising capital for businesses Mobilising savings for investment Facilitating company growth Profit sharing Corporate governance Creating investment opportunities for small investors Government capital-raising for development projects Barometer of the economy

How Is Trading In A Stock Exchange Is Done?

Stock Exchange is a place where anyone with money in his pockets can trade for shares.The Basic way of trading on the stock exchange is to open an account with a broker who has a ticket to trade on behalf of her customers on stock exchange. You can open your account with the broker either by submitting the required amount of money or shares or stocks whatever you call it. Every broker has different requirements for opening an account with different requirements for amounts of money that can be deposited into the account. Broker trade on behalf of you by taking your orders mostly on phone for any stock you want to trade and in return charges a certain amount of commission. There are two different kinds of brokers. One who simply trade on behalf of you and others are called dealers which are also called market makers. a market maker is a person who at the end of day matches cost at which you purchased your shares and their day end prices. if day end prices are higher than the cost at which you purchased your shares, he will issue a margin call for depositing the necessary funds to level your funds with the price of your shares.

How does a stock exchange operate?

With the help of stockbrokers, the buyers and sellers participating in a stock market carry out their transactions. The brokers representing selling parties take their orders to the stock exchange floor and then find brokers representing parties willing to invest in similar stocks. If both parties agree to trade at the fixed price, the transaction takes place.

What are the requirements to trade in a stock exchange?

Companies have to meet the requirements of the exchange in order to have their stocks listed and traded, but requirements vary by stock exchange. However, the common requirements are that to be able to trade a security on a certain stock exchange, it has to be listed there and trading is done by members only.In India, Bombay Stock Exchange which is the oldest stock exchange in Asia located in Dalal Street Mumbai .India has requirements for a minimum market capitalisation of Rs 25 crore (Rs 250 million) and minimum public float equivalent to Rs 10 crore (Rs 100 million).
Stock exchanges have multiple roles in the economy. This may include the following:

Raising capital for businesses

The Stock Exchange provide companies with the facility to raise capital for expansion through selling shares to the investing public.

Common forms of capital raising

Besides the borrowing capacity provided to an individual or firm by the banking system, in the form of credit or a loan, there are four common forms of capital raising used by companies and entrepreneurs. All of these available options, might be achieved, directly or indirectly, involving a stock exchange.

Going public
Capital intensive companies, particularly high tech companies, always need to raise high volumes of capital in their early stages. By this reason, the public market provided by the stock exchanges, has been one of the most important funding sources for many capital intensive startups.

Limited partnerships
A number of companies have also raised significant amounts of capital through R&D limited partnerships. Tax law changes that were enacted in 1987 in the United States changed the tax deductibility of investments in R&D limited partnerships. In order for a partnership to be of interest to investors today, the cash-on-cash return must be high enough to entice investors. As a result, R&D limited partnerships are not a viable means of raising money for most companies, specially hi-tech startups.

Venture capital
A third usual source of capital for startup companies has been venture capital. This source remains largely available today, but the maximum statistical amount that the venture company firms in aggregate will invest in any one company is not limitless (it was approximately $15 million in 2001 for a biotechnology company).[5] At those level, venture capital firms typically become tapped-out because the financial risk to any one partnership becomes too great.

Corporate partners
A fourth alternative source of cash for a private company is a corporate partner, usually an established multinational company, which provides capital for the smaller company in return for marketing rights, patent rights, or equity. Corporate partnerships have been used successfully in a large number of cases.

Mobilizing savings for investment

When people draw their savings and invest in shares (through a IPO or the issuance of new company shares of an already listed company), it usually leads to rational allocation of resources because funds, which could have been consumed, or kept in idle deposits with banks, are mobilized and redirected to help companies' management boards finance their organizations. This may promote business activity with benefits for several economic sectors such as agriculture, commerce and industry, resulting in stronger economic growth and higherproductivity levels of firms. Sometimes it is very difficult for the stock investor to determine whether or not the allocation of those funds is in good faith and will be able to generate long-term company growth, without examination of a company's internal auditing.

Facilitating company growth

Companies view acquisitions as an opportunity to expand product lines, increase distribution channels, hedge against volatility, increase itsmarket share, or acquire other necessary business assets. A takeover bid or a merger agreement through the stock market is one of the simplest and most common ways for a company to grow by acquisition or fusion.

Profit sharing
Both casual and professional stock investors, as large as institutional investors or as small as an ordinary middle class family, throughdividends and stock price increases that may result in capital gains, share in the wealth of profitable businesses. Unprofitable and troubled businesses may result in capital losses for shareholders.

Corporate governance
By having a wide and varied scope of owners, companies generally tend to improve management standards and efficiency to satisfy the demands of these shareholders, and the more stringent rules for public corporations imposed by public stock exchanges and the government. Consequently, it is alleged that public companies (companies that are owned by shareholders who are members of the general public and trade shares on public exchanges) tend to have better management records than privately held companies (those companies where shares are not publicly traded, often owned by the company founders and/or their families and heirs, or otherwise by a small group of investors). However, when poor financial, ethical or managerial records are known by the stock investors, the stock and the company tend to lose value. In the stock exchanges, shareholders of underperforming firms are often penalized by significant share price decline, and they tend as well to dismiss incompetent management teams.

Creating investment opportunities for small investors

As opposed to other businesses that require huge capital outlay, investing in shares is open to both the large and small stock investorsbecause a person buys the number of shares they can afford. Therefore the Stock Exchange provides the opportunity for small investors to own shares of the same companies as large investors.

Government capital-raising for development projects

Governments at various levels may decide to borrow money to finance infrastructure projects such as sewage and water treatment works or housing estates by selling another category of securities known as bonds. These bonds can be raised through the Stock Exchange whereby members of the public buy them, thus loaning money to the government. The issuance of such bonds can obviate the need, in the short term, to directly tax citizens to finance developmentthough by securing such bonds with the full faith and credit of the government instead of with collateral, the government must eventually tax citizens or otherwise raise additional funds to make any regular coupon payments and refund the principal when the bonds mature.

Barometer of the economy

At the stock exchange, share prices rise and fall depending, largely, on market forces. Share prices tend to rise or remain stable when companies and the economy in general show signs of stability and growth. An economic recession, depression, or financial crisis could eventually lead to a stock market crash.

Listing requirements
Listing requirements are the set of conditions imposed by a given stock exchange upon companies that want to be listed on that exchange. Such conditions sometimes include minimum number of shares outstanding, minimum market capitalization, and minimum annual income.

Requirements by stock exchange

Companies must meet an exchange's requirements to have their stocks and shares listed and traded there, but requirements vary by stock exchange:

Bombay Stock Exchange: Bombay Stock Exchange (BSE) has requirements for a minimum market capitalization of 25 crore and minimum public float equivalent to 10 crore.

Drawbacks
While there are benefits to going public, it also means additional obligations and reporting requirements on the companies and its directors:

Increasing accountability to public shareholders. Need to maintain dividend and profit growth trends. Becoming more vulnerable to an unwelcome takeover. Need to observe and adhere strictly to the rules and regulations by governing bodies. Increasing costs in complying with higher level of reporting requirements. Relinquishing some control of the company following the public offering. Suffering a loss of privacy as a result of media interest.