capital market

What is Stock Exchange? Meaning

Stock Exchange (also called Stock Market or 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.

It performs various functions and offers useful services to investors and borrowing companies. It is an investment intermediary and facilitates economic and industrial development of a country.

Stock exchange is an organized market for buying and selling corporate and other securities. Here, securities are purchased and sold out as per certain well-defined rules and regulations. It provides a convenient and secured mechanism or platform for transactions in different securities. Such securities include shares and debentures issued by public companies which are duly listed at the stock exchange, and bonds and debentures issued by government, public corporations and municipal and port trust bodies.

Stock exchanges are indispensable for the smooth and orderly functioning of corporate sector in a free market economy. A stock exchange need not be treated as a place for speculation or a gambling den. It should act as a place for safe and profitable investment, for this, effective control on the working of stock exchange is necessary. This will avoid misuse of this platform for excessive speculation, scams and other undesirable and anti-social activities.

London stock exchange (LSE) is the oldest stock exchange in the world. While Bombay stock exchange (BSE) is the oldest in India. Similar Stock exchanges exist and operate in large majority of countries of the world.

Definitions of Stock Exchange

According to Husband and Dockerary,

"Stock exchanges are privately organized markets which are used to facilitate trading in securities."

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."

Features of Stock Exchange

Characteristics or features of stock exchange are:-

1. Market for securities : Stock exchange is a market, where securities of corporate bodies, government and semi-government bodies are bought and sold.
2. 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.
3. 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
4. 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.
5. 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.
6. Association of persons : A stock exchange is an association of persons or body of individuals which may be registered or unregistered.
7. Recognition from Central Government : Stock exchange is an organised market. It requires recognition from the Central Government.
8. 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.
9. 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.
10. 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.

Meaning and Concept of Capital Market

Capital Market is one of the significant aspect of every financial market. Hence it is necessary to study its correct meaning. Broadly speaking the capital market is a market for financial assets which have a long or indefinite maturity. Unlike money market instruments the capital market intruments become mature for the period above one year. It is an institutional arrangement to borrow and lend money for a longer period of time. It consists of financial institutions like IDBI, ICICI, UTI, LIC, etc. These institutions play the role of lenders in the capital market. Business units and corporate are the borrowers in the capital market. Capital market involves various instruments which can be used for financial transactions. Capital market provides long term debt and equity finance for the government and the corporate sector. Capital market can be classified into primary and secondary markets. The primary market is a market for new shares, where as in the secondary market the existing securities are traded. Capital market institutions provide rupee loans, foreign exchange loans, consultancy services and underwriting.

Significance, Role or Functions of Capital Market

Like the money market capital market is also very important. It plays a significant role in the national economy. A developed, dynamic and vibrant capital market can immensely contribute for speedy economic growth and development.

Let us get acquainted with the important functions and role of the capital market.

1. Mobilization of Savings : Capital market is an important source for mobilizing idle savings from the economy. It mobilizes funds from people for further investments in the productive channels of an economy. In that sense it activate the ideal monetary resources and puts them in proper investments.
2. Capital Formation : Capital market helps in capital formation. Capital formation is net addition to the existing stock of capital in the economy. Through mobilization of ideal resources it generates savings; the mobilized savings are made available to various segments such as agriculture, industry, etc. This helps in increasing capital formation.
3. Provision of Investment Avenue : Capital market raises resources for longer periods of time. Thus it provides an investment avenue for people who wish to invest resources for a long period of time. It provides suitable interest rate returns also to investors. Instruments such as bonds, equities, units of mutual funds, insurance policies, etc. definitely provides diverse investment avenue for the public.
4. Speed up Economic Growth and Development : Capital market enhances production and productivity in the national economy. As it makes funds available for long period of time, the financial requirements of business houses are met by the capital market. It helps in research and development. This helps in, increasing production and productivity in economy by generation of employment and development of infrastructure.
5. Proper Regulation of Funds : Capital markets not only helps in fund mobilization, but it also helps in proper allocation of these resources. It can have regulation over the resources so that it can direct funds in a qualitative manner.
6. Service Provision : As an important financial set up capital market provides various types of services. It includes long term and medium term loans to industry, underwriting services, consultancy services, export finance, etc. These services help the manufacturing sector in a large spectrum.
7. Continuous Availability of Funds : Capital market is place where the investment avenue is continuously available for long term investment. This is a liquid market as it makes fund available on continues basis. Both buyers and seller can easily buy and sell securities as they are continuously available. Basically capital market transactions are related to the stock exchanges. Thus marketability in the capital market becomes easy.

These are the important functions of the capital market.

Final Glance and Conclusion on Capital Market

The lack of an advanced and vibrant capital market can lead to underutilization of financial resources. The developed capital market also provides access to the foreign capital for domestic industry. Thus capital market definitely plays a constructive role in the over all development of an economy.

Recent Developments in Capital Market of India

The Indian capital market has witnessed major reforms in the decade of 1990s and there after. It is on the verge of the growth.

Thus, the Government of India and SEBI has taken a number of measures in order to improve the working of the Indian stock exchanges and to make it more progressive and vibrant.

Image or picture of SEBI Bhavan (House) in Mumbai, India.

Reforms in Capital Market of India

The major reforms undertaken in capital market of India includes:-

1. Establishment of SEBI : The Securities and Exchange Board of India (SEBI) was established in 1988. It got a legal status in 1992. SEBI was primarily set up to regulate the activities of the merchant banks, to control the operations of mutual funds, to work as a promoter of the stock exchange activities and to act as a regulatory authority of new issue activities of companies. The SEBI was set up with the fundamental objective, "to protect the interest of investors in securities market and for matters connected therewith or incidental thereto."

The main functions of SEBI are:-

1. To regulate the business of the stock market and other securities market.
2. To promote and regulate the self regulatory organizations.
3. To prohibit fraudulent and unfair trade practices in securities market.
4. To promote awareness among investors and training of intermediaries about safety of market.
5. To prohibit insider trading in securities market.
6. To regulate huge acquisition of shares and takeover of companies.
1. Establishment of Creditors Rating Agencies : Three creditors rating agencies viz. The Credit Rating Information Services of India Limited (CRISIL - 1988), the Investment Information and Credit Rating Agency of India Limited (ICRA - 1991) and Credit Analysis and Research Limited (CARE) were set up in order to assess the financial health of different financial institutions and agencies related to the stock market activities. It is a guide for the investors also in evaluating the risk of their investments.
2. Increasing of Merchant Banking Activities : Many Indian and foreign commercial banks have set up their merchant banking divisions in the last few years. These divisions provide financial services such as underwriting facilities, issue organising, consultancy services, etc. It has proved as a helping hand to factors related to the capital market.
3. Candid Performance of Indian Economy : In the last few years, Indian economy is growing at a good speed. It has attracted a huge inflow of Foreign Institutional Investments (FII). The massive entry of FIIs in the Indian capital market has given good appreciation for the Indian investors in recent times. Similarly many new companies are emerging on the horizon of the Indian capital market to raise capital for their expansions.
4. Rising Electronic Transactions : Due to technological development in the last few years. The physical transaction with more paper work is reduced. Now paperless transactions are increasing at a rapid rate. It saves money, time and energy of investors. Thus it has made investing safer and hassle free encouraging more people to join the capital market.
5. Growing Mutual Fund Industry : The growing of mutual funds in India has certainly helped the capital market to grow. Public sector banks, foreign banks, financial institutions and joint mutual funds between the Indian and foreign firms have launched many new funds. A big diversification in terms of schemes, maturity, etc. has taken place in mutual funds in India. It has given a wide choice for the common investors to enter the capital market.
6. Growing Stock Exchanges : The numbers of various Stock Exchanges in India are increasing. Initially the BSE was the main exchange, but now after the setting up of the NSE and the OTCEI, stock exchanges have spread across the country. Recently a new Inter-connected Stock Exchange of India has joined the existing stock exchanges.
7. Investor's Protection : Under the purview of the SEBI the Central Government of India has set up the Investors Education and Protection Fund (IEPF) in 2001. It works in educating and guiding investors. It tries to protect the interest of the small investors from frauds and malpractices in the capital market.
8. Growth of Derivative Transactions : Since June 2000, the NSE has introduced the derivatives trading in the equities. In November 2001 it also introduced the future and options transactions. These innovative products have given variety for the investment leading to the expansion of the capital market.
9. Insurance Sector Reforms : Indian insurance sector has also witnessed massive reforms in last few years. The Insurance Regulatory and Development Authority (IRDA) was set up in 2000. It paved the entry of the private insurance firms in India. As many insurance companies invest their money in the capital market, it has expanded.
10. Commodity Trading : Along with the trading of ordinary securities, the trading in commodities is also recently encouraged. The Multi Commodity Exchange (MCX) is set up. The volume of such transactions is growing at a splendid rate.

Apart from these reforms the setting up of Clearing Corporation of India Limited (CCIL), Venture Funds, etc., have resulted into the tremendous growth of Indian capital market

Structure of Indian Capital Market with Diagram

Broadly speaking the capital market is classified in to two categories. They are the Primary market (New Issues Market) and the Secondary market (Old (Existing) Issues Market). This classification is done on the basis of the nature of the instrument brought in the market. However on the basis of the types of institutions involved in capital market, it can be classified into various categories such as the Government Securities market or Gilt-edged market, Industrial Securities market, Development Financial Institutions (DFIs) and Financial intermediaries. All of these components have specific features to mention. The structure of the Indian capital market has its distinct features. These different segments of the capital market help to develop the institution of capital market in many dimensions. The primary market helps to raise fresh capital in the market. In the secondary market, the buying and selling (trading) of capital market instruments takes place. The following chart will help us in understanding the organizational structure of the Indian Capital market.

1. Government Securities Market : This is also known as the Gilt-edged market. This refers to the market for government and semi-government securities backed by the Reserve Bank of India (RBI).
2. Industrial Securities Market : This is a market for industrial securities i.e. market for shares and debentures of the existing and new corporate firms. Buying and selling of such instruments take place in this market. This market is further classified into two types such as the New Issues Market (Primary) and the Old (Existing) Issues Market (secondary). In primary market fresh capital is raised by companies by issuing new shares, bonds, units of mutual funds and debentures. However in the secondary market already existing i.e old shares and debentures are traded. This trading takes place through the registered stock exchanges. In India we have three prominent stock exchanges. They are the Bombay Stock Exchange (BSE), the National Stock Exchange (NSE) and Over The Counter Exchange of India (OTCEI).
3. Development Financial Institutions (DFIs) : This is yet another important segment of Indian capital market. This comprises various financial institutions. These can be special purpose institutions like IFCI, ICICI, SFCs, IDBI, IIBI, UTI, etc. These financial institutions provide long term finance for those purposes for which they are set up.
4. Financial Intermediaries : The fourth important segment of the Indian capital market is the financial intermediaries. This comprises various merchant banking institutions, mutual funds, leasing finance companies, venture capital companies and other financial institutions.

These are important institutions and segments in the Indian capital market.

SEBI Regulates Indian Capital Market

For the smooth functioning of the capital market a proper coordination among above organizations and segments is a prerequisite. In order to regulate, promote and direct the progress of the Indian Capital Market, the government has set up 'Securities and Exchange Board of India' (SEBI). SEBI is the supreme authority governing and regulating the Capital Market of India.

List of Terms relating to Indian Stock Exchange ↓

List of the important terms relating to indian stock exchange transactions.

1. Group A Shares

These are the listed equity shares of large and well established companies having broad investor base. These shares are actively traded and for these shares the facility for carrying forward a transaction from one accounting period to another is available. Naturally, these shares attract a lot of speculative multiples. These facilities are not available for group B shares. However, shares can be moved from Group B to Group A and vice versa depending on criteria for shifting. For instance the Bombay Stock Exchange has laid down several criteria for shifting shares from Group B to Group A; such as, an equity base of Rs. 10 crores, a market capitalization of Rs. 25-30 crores, a public holding of 35 to 40 percent, a shareholding population of 15,000 to 20,000, good dividend paying status, etc.

2. Group B Shares

These are those listed shares which do not follow the criteria prescribed for Group A shares. Group B shares are again divided into B1 and B shares on BSE. B1 shares represent well traded scrips among B group and they have weekly settlements.

3. Group C Shares

Under Group C, only odd lots and permitted securities are included. A number of shares that are less than the market lot are called odd lots. Market lot refers to the minimum number of shares of a particular security that must be transacted on a stock exchange. Odd lots have settlement once in a fortnights or once on Saturdays. Permitted securities are those that are not listed on a stock exchange but are listed on other exchanges in India. So they are permitted to be traded on BSE. Odd lots cannot be easily transacted on the stock exchange and so they are illiquid in nature.

4. Arbitration

Arbitration is a quasi-judicial process to resolve a dispute which is faster and inexpensive. The stock exchange facilitates the process of arbitration between the member and their clients. The disputes between the parties are resolved through arbitration in accordance with the by-laws of the exchange. Arbitration is required in the matters such as settlement of claims, differences and disputes between one member and another, between a member and his clients, sub-brokers or authorised clerks etc.

5. Arbitrage

Arbitrage is undertaken to make a profit out of differences in prices of a security in two different markets. It is a highly skilled speculative activity. If the prices of a security differ substantially in the two stock markets, the speculator purchases the security in the market where it is cheap and sells it at a profit in another market where it is quoted high and thus makes huge profit. The speculator has to act very fast since the prices are highly sensitive and they may get equalised within a short span of time.

The arbitrage may be carried on between the two markets within the country or in two different countries. The former is called 'domestic arbitrage' and the latter 'foreign arbitrage'. Arbitrage ultimately helps in equalising the prices of securities at different places; hence, it is beneficial to market. The brokers who carry arbitrage activity are called arbitragers.

6. Auction

An auction is a mechanism utilised by the exchange to fulfil its obligation to a counter party member when a member fails to deliver good securities or make the payment. The stock exchange, in such cases, arranges to buy good securities through auction and deliver them to the buying broker or arranges to realise the cash and pay it to the selling broker.

7. At Best Order

It is an order from an investor for the purchase or sale of securities wherein the investor does not specify a price at which the purchase or sale of securities should be made by broker on his behalf. Such order must be executed by the broker at best possible price. The client may also fix a time frame within which the order has to be executed. e. g. "Buy 200 Reliance Industries at best".

8. Authorised Clerk

An authorised clerk is a representative appointed by a stock broker to assist him in the securities trading. A broker cannot remain present all the time on trading floor of stock exchange, hence he requires assistants to carry out trading activities on his behalf. As per the rules of the stock exchange, each broker can employ a specified number of authorised clerks to transact his business. They are also called 'member assistants'. At Bombay, Madras & Calcutta Stock exchanges the number of authorised clerks allowed by a broker are 5, 3 and 8 respectively. Generally, authorised clerks are given power of attorney to act on behalf of broker & hence they can sign on behalf of brokers.

9. Bad Delivery Cell

A delivery of shares turns out to be bad if there is a company objection on account of signature difference, or if shares are fake, forged or stolen etc. In such a case the investor can approach the bad delivery cell of stock exchange through his broker for correction or replacement with good delivery.

10. Bid and Offer

Bid refers to the price of a share which a prospective buyer is ready to pay for particular scrip. Offer is the price at which a share is offered for a sale on stock exchange.

11. Brokerage

Brokerage means the commission charged by a broker for purchase or sale of securities done through him. The maximum brokerage chargeable as stipulated by SEBI is at present 2.5 % of the trade value.

12. BOLT

Bombay Stock Exchange has introduced BOLT. That is, BSE - On - Line - Trading - System for listed securities. Trading is order driven as quote driver system is discontinued. For this purpose BSE classified the listed securities into 5 categories. Viz. A, B1, B2, F, G and Z. Out of these A, B1 and B2 groups represent equity segment. Group F represents securities which have fixed income, 'G' group represents Government Securities whereas 'Z' represents those companies which failed to comply with listing norms or failed to redress investors' complaints or failed to comply with depository requirements. Trading of securities of listed companies of other exchanges is also permitted and these securities are categorised in 'Permitted Securities.'

13. 'Badla' or Carry Forward Trading

Carry Forward or 'Badla' refers to the trading in which the settlement of a transaction is postponed to the next settlement period on payment of some charges by way of interest known as Badla Charges. Carryover or Badla is a facility given to the speculator by the other party to carry forward the transaction from one settlement period to another. The scrips in specified categories (i.e. Group A) alone could be carried forward. Badla charges vary from period to period and are fixed fortnightly.

14. Bulls

Bulls are those brokers of stock exchange who are very optimistic of the rise in prices of securities. Hence, they go on buying shares in expectation of selling them at higher prices later. Thus, in a bull market there will be excess of purchase over sales. Bulls are also called 'Tejiwallas'.

15. Bears

Bears are those member brokers of stock exchange who are always pessimistic in approach. They expect a fall in prices of securities. Hence, they go on selling securities. They are also called Mandiwallas. A Bearish market refers to a market where prices of shares are falling continuously where there are excess of sales over purchases.

16. Blank transfers

Blank transfers facilitate speculative activities through badla transactions. If a seller (or transferer) of security simply signs the transfer form without specifying the name of buyer (or transferee), it is called a blank transfer. Badla transactions involve temporary purchases and sales of securities. If they have to be registered, it involves lot of inconveniences due to registration fees, stamp duty, etc. Hence, to avoid such inconveniences blank transfers are increasingly used to carryover the transaction.

17. Circuit breakers

Its a mechanism by which Stock Exchanges temporarily suspend the trading in a security when its prices are volatile and tend to breach the price band.

18. Clearing

Clearing is a process through which all transactions between members of stock exchange are settled through multilateral netting.

19. Company objection

For transfer of a security a transferer sends a scrip certificate along with the transfer deed to the company. In some cases the company refuses the registration of transfer on account of signature difference, or fake, forged or stolen shares. In such cases the company returns the documents sent along with a letter which is termed as a 'company objection'.

20. Cornering

It refers to the process of holding entire supply of a particular security by an individual or a group of individuals with a view to dictating terms to the short sellers and earning more profits.

21. Clearing Settlement

Under this method, the transactions are cleared and settled through the clearing house. Usually those securities which are frequently traded and are usually in demand are cleared through the clearing house.

22. Client brokers

These brokers do simple braking business by acting as intermediaries between the buyers and sellers and they earn only brokerage for their services rendered to the clients.

23. Cum-bonus

The shares are called cum-bonus when a purchaser is entitled to receive the current bonus declared by company.

24. Cum-rights

The share is described as cum-rights when a purchaser is entitled to receive the current-rights shares declared by the company.

25. Day order

A day order, as the name suggests, is an order which is valid for the day on which it is entered. If the order cannot be executed during the day, it gets cancelled automatically.

26. Discretionary order

It is an order placed by a client to buy or sell shares at whatever price the broker thinks reasonable. This is possible only when the client has complete faith on the broker.

27. Ex-bonus

The share is described as ex-bonus when a purchaser is not entitled to receive the current bonus, the right to which remains with the seller.

8. Ex-rights

The share is described as ex-rights when a purchaser is not entitled to receive the current rights, the right of which remains with the seller.

29. Forward trading

Forward trading refers to trading where contracts traded today are settled at some future date at prices decided today.

30. Good-bad delivery

A share certificate together with its transfer form which meets all the requirements of title transfer from seller to buyer is called good delivery in the market.

Delivery of a share certificate, together with a deed to transfer, which does not meet requirements of title transfer from seller to buyer is called a bad delivery in the market.

31. Hand Delivery Settlement

Under this method, the delivery of securities and payment are affected within the time stipulated in the agreement or within 14 days from the date of contract whichever is earlier. Most of the transactions are conducted on the basis of hand delivery settlements.

32. Insider Trading

It means trading in a company's shares by a person who is associated with that company. As a result of his association he has a secret price sensitive information about the company such as expansion plans, financial results, takeover bid, bonus or right issue etc. He tries to exploit that information and maximise his profit through trading in the scrip of that company. It is a crime and hence prohibited by stock exchanges.

33. Jumbo certificate

A jumbo share certificate is a single composite share certificate issued by consolidating-a large number of market lots.

34. Jobbers

A jobber is a professional independent broker who deals in securities on his own behalf. Like brokers he does not purchase or sell securities on behalf of a client for a commission. Instead he purchases the securities in his own name and sells them out when the prices of those securities increase and thereby earn a profit. He is like a stockist of security of different companies. He buys securities as a owner, keeps them for a very short period and sells them for profit known as 'jobbers turn'. He works for a profit and not for a commission.

35. Lame ducks

Lame ducks are bear brokers (expecting decline in prices) who ultimately sell the securities ultimately at a loss by making wrong moves. They lose in market due to the wrong prediction that share prices will decline but in reality they increase. Generally, they contract to sell securities which they do not posses, therefore, they are caught in a wrong foot.

36. Limit order

It is an order for the purchase or sale of a scrip at a fix price specified by the client. e.g. "Sell 100 TISCO shares @ Rs. 280".

37. Market Lot

Market lot refers to the minimum number of shares of a particular security that must be transacted on the exchange. Market lot may be 10 shares, 20 shares, 50 shares or 100 shares. Multiples of the market lot may also be transacted. In demat scrips the market lot is 1 share.

38. No-delivery period

Whenever a book closure or record date is announced by a company, the Exchange sets a no-delivery period for that security. During this period, trading is permitted in that security. However, these trades are settled only after the no-delivery period is over. This is done to ensure that investor's entitlement for corporate benefits is clearly determined.

39. Odd lot

A number of shares that are less than the market lot are known as odd lots. Under the scrip based delivery system, these shares are normally traded at a discount to the prevailing price for the marketable lot.

40. Order-driven trading

It is a trading initiated by buy I sell orders, from investors / brokers.

41. Over-the Counter trading

Trading in those stocks which are not listed on a stock exchange.

42. Open order

It is an order to buy or sell a security received from a client without fixing any time limit or price limit on the execution of the order. It is similar to discretionary order.

43. Pay-in

Pay-in day is the designated day on which the securities or funds are delivered / paid in by the members to the clearing house of the Exchange.

44. Pay-out

Pay-out is the designated day on which securities and funds are delivered I paid out to the members by the clearing house of the Exchange.

45. Price band

The daily / weekly price limits within which price of a security is allowed to rise or fall.

46. Price rigging (or Rigging the market)

When a person or persons acting in concert with each other collude to artificially increase or decrease the price of a security, that process is called price rigging or rigging the market. It is an undesirable activity since it prevents the free interplay of demand and supply. Stock exchanges and SEBI try to discourage such practice.

47. Quote-driven trading

Trading where brokers / market makers give buy I sell quote for a scrip simultaneously.

48. Record date

Record date is the date on which the beneficial ownership of an investor is entered into the register of members. Such a member is entitled to get all the corporate benefits.

49. Rematerialisation of shares

It is the process through which shares held in electronic form in depository are converted into physical form.

50. Screen based trading

When buying / selling of securities is done using computers and matching of trades is done by a stock exchange computer.

51. Settlement

It refers to the scrip-wise netting of trades by a broker after the trading period is over.

52. Settlement guarantee

Settlement guarantee is the guarantee provided by the clearing corporation for settlement of all trades even if a party defaults to deliver securities or pay cash.

53. Splitting /Consolidation

The process of splitting shares that have a high face value into shares of a lower face value is known as splitting. The reverse process of combining shares that have a low face value into one share of higher value is known as consolidation.

54. Spot trading

Trading by delivery of shares and payment for the same on the date of purchase or on the next day.

55. Stop transfer

It is an instruction given by a registered holder of shares to the company to stop the transfer of shares in his name as a result of theft, misplacement, loss of share certificates.

56. Stags

Stags are those members in share market who neither buy nor sell securities in stock exchange. They simply apply for subscription to new issues expecting to sell them at a higher price later when the issues are quoted on stock exchange. Generally, stags buy new issues and sell them on allotment or even before allotment for a profit. Since they act fast they are called stags - a fast runner.

57. Spot delivery settlement

These transactions are to be settled by delivery and payment on the date of contract or on the next day.

58. Special delivery

Delivery and payment made anytime exceeding 14 days, but not exceeding 2 months, following the date of the contract as may be stipulated when entering into the bargain and permitted by the Governing Board or the President.

59. Stop Loss Order

It is an order by a client to sell as soon as the prices fall upto a particular level or to buy when the price rises up to a specified level. This is mainly to protect the clients against a heavy fall or rise in prices so that they may not suffer more than the pre-specified amount.

60. Trade guarantee

Trade guarantee is the guarantee provided by the clearing corporation for all trades that are executed on the exchange. In contrast, at the settlement guarantee, guarantees the settlement of trade after multilateral netting.

61. Transfer deed

A transfer deed is a form that is used for effecting transfer of shares or debentures and is valid for a specified period. It should be sent, to the company along with the share certificate for registering the transfer. The transfer deed must be duly stamped and signed by or on behalf of the transferor and transferee and complete in all respects.

62. Wash Sales

Wash sales is a kind of fictitious transaction through which a speculator is able to reap huge profit by creating a misleading picture in the market. He makes fictitious sale of a security and then makes a purchase of the same security at higher price through another broker. Thus, he creates a misleading opinion in the market as if the price of a security in question is rising. As a result of such false opinion, when the price of the security actually rises the speculator sells it to earn a good profit. Wash sale is a kind of cheating hence stock exchanges impose severe penalty on such sales.

63. Wolves

These are the brokers who are fast and smart speculators. They quickly perceive changes in the trends in the market and trade fast to make profit. They are not generally caught in the wrong foot.

Powers of SEBI

The important powers of SEBI (Securities and Exchange Board of India) are:-

1. Powers relating to stock exchanges & intermediaries

SEBI has wide powers regarding the stock exchanges and intermediaries dealing in securities. It can ask information from the stock exchanges and intermediaries regarding their business transactions for inspection or scrutiny and other purpose.

2. Power to impose monetary penalties

SEBI has been empowered to impose monetary penalties on capital market intermediaries and other participants for a range of violations. It can even impose suspension of their registration for a short period.

3. Power to initiate actions in functions assigned

SEBI has a power to initiate actions in regard to functions assigned. For example, it can issue guidelines to different intermediaries or can introduce specific rules for the protection of interests of investors.

4. Power to regulate insider trading

SEBI has power to regulate insider trading or can regulate the functions of merchant bankers.

5. Powers under Securities Contracts Act

For effective regulation of stock exchange, the Ministry of Finance issued a Notification on 13 September, 1994 delegating several of its powers under the Securities Contracts (Regulations) Act to SEBI.

SEBI is also empowered by the Finance Ministry to nominate three members on the Governing Body of every stock exchange.

6. Power to regulate business of stock exchanges

SEBI is also empowered to regulate the business of stock exchanges, intermediaries associated with the securities market as well as mutual funds, fraudulent and unfair trade practices relating to securities and regulation of acquisition of shares and takeovers of companies

What is SEBI?

Securities and Exchange Board of India (SEBI) is an apex body for overall development and regulation of the securities market. It was set up on April 12, 1988. To start with, SEBI was set up as a non-statutory body. Later on it became a statutory body under the Securities Exchange Board of India Act, 1992. The Act entrusted SEBI with comprehensive powers over practically all the aspects of capital market operations.

Role Functions of SEBI

The role or functions of SEBI are discussed below.

1. To protect the interests of investors through proper education and guidance as regards their investment in securities. For this, SEBI has made rules and regulation to be followed by the financial intermediaries such as brokers, etc. SEBI looks after the complaints received from investors for fair settlement. It also issues booklets for the guidance and protection of small investors.
2. To regulate and control the business on stock exchanges and other security markets. For this, SEBI keeps supervision on brokers. Registration of brokers and sub-brokers is made compulsory and they are expected to follow certain rules and regulations. Effective control is also maintained by SEBI on the working of stock exchanges.
3. To make registration and to regulate the functioning of intermediaries such as stock brokers, sub-brokers, share transfer agents, merchant bankers and other intermediaries operating on the securities market. In addition, to provide suitable training to intermediaries. This function is useful for healthy atmosphere on the stock exchange and for the protection of small investors.
4. To register and regulate the working of mutual funds including UTI (Unit Trust of India). SEBI has made rules and regulations to be followed by mutual funds. The purpose is to maintain effective supervision on their operations & avoid their unfair and anti-investor activities.
5. To promote self-regulatory organization of intermediaries. SEBI is given wide statutory powers. However, self-regulation is better than external regulation. Here, the function of SEBI is to encourage intermediaries to form their professional associations and control undesirable activities of their members. SEBI can also use its powers when required for protection of small investors.
6. To regulate mergers, takeovers and acquisitions of companies in order to protect the interest of investors. For this, SEBI has issued suitable guidelines so that such mergers and takeovers will not be at the cost of small investors.
7. To prohibit fraudulent and unfair practices of intermediaries operating on securities markets. SEBI is not for interfering in the normal working of these intermediaries. Its function is to regulate and control their objectional practices which may harm the investors and healthy growth of capital market.
8. To issue guidelines to companies regarding capital issues. Separate guidelines are prepared for first public issue of new companies, for public issue by existing listed companies and for first public issue by existing private companies. SEBI is expected to conduct research and publish information useful to all market players (i.e. all buyers and sellers).
9. To conduct inspection, inquiries & audits of stock exchanges, intermediaries and self-regulating organizations and to take suitable remedial measures wherever necessary. This function is undertaken for orderly working of stock exchanges & intermediaries.
10. To restrict insider trading activity through suitable measures. This function is useful for avoiding undesirable activities of brokers and securities scams.

Services given by Stock Exchange to Investors ↓

1. Provides liquidity to investement : Stock exchange provides liquidity (i.e easy 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.
2. Provides collateral value to securities : Stock exchange provides better value to securities as collateral for a loan. This facilitates borrowing from a bank against securities on easy terms.
3. 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.
4. 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.
5. 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).

Services given by Stock Exchange to Companies ↓

1. Widens market for securities : Stock exchange widens the market for the listed securities and enables the companies to collect capital for promotion, expansion and modernization purpose. It indirectly provides financial support to companies / corporations.
2. Creates goodwill and reputation : Stock exchange enhances the goodwill and the reputation of the companies whose securities are listed. Listing acts as a charater certificate given to a company. It gives prestigious position to company.
3. Facilitates fair pricing of listed securities : The market price of listed securities tends to be slightly higher in relation to earnings and property values.
4. Provides better response from investors : Listed securities get better response from the investor due to safety and security. Listing of securities is a unique service which stock exchanges offer to companies. It is a moral support given to stable companies.
5. Facilitates quick selling of securities : Stock exchange enables companies to sell their securities easily and quickly. This is natural as investors always prefer to invest money in listed securities.

Service given by Stock Exchange to Economy ↓

1. Brings economic development : Stock exchanges brings rapid economic development through mobilization of funds for productive purposes. This facilitates the process of economic growth

Functions of Stock Exchange - Main Functions In The Market

1. 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.

2. 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).

3. 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.

4. 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.

5. 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.

6. Facilitates public borrowing

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

7. 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.

8. 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.

9. 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.

10. 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.

Role of Stock Exchanges In Capital Market of India

Stock Exchanges play a crucial role in the consolidation of a national economy in general and in the development of industrial sector in particular. It is the most dynamic and organised component of capital market. Especially, in developing countries like India, the stock exchanges play a cardinal role in promoting the level of capital formation through effective mobilisation of savings and ensuring investment safety.

Lets study the role of stock exchanges in capital market of India :-

1. Effective Mobilisation of savings

Stock exchanges provide organised market for an individual as well as institutional investors. They regulate the trading transactions with proper rules and regulations in order to ensure investor's protection. This helps to consolidate the confidence of investors and small savers. Thus, stock exchanges attract small savings especially of large number of investors in the capital market.

2. Promoting Capital formation

The funds mobilised through capital market are provided to the industries engaged in the production of various goods and services useful for the society. This leads to capital formation and development of national assets. The savings mobilised are channelised into appropriate avenues of investment.

3. Wider Avenues of investment

Stock exchanges provide a wider avenue for the investment to the people and organisations with investible surplus. Companies from diverse industries like Information Technology, Steel, Chemicals, Fuels and Petroleum, Cement, Fertilizers, etc. offer various kinds of equity and debt securities to the investors. Online trading facility has brought the stock exchange at the doorsteps of investors through computer network. Diverse type of securities is made available in the stock exchanges to suit the varying objectives and notions of different classes of investor. Necessary information from stock exchanges available from different sources guides the investors in the effective management of their investment portfolios.

4. Liquidity of investment

Stock exchanges provide liquidity of investment to the investors. Investors can sell out any of their investments in securities at any time during trading days and trading hours on stock exchanges. Thus, stock exchanges provide liquidity of investment. The on-line trading and online settlement of demat securities facilitates the investors to sellout their investments and realise the proceeds within a day or two. Even investors can switch over their investment from one security to another according to the changing scenario of capital market.

5. Investment priorities

Stock exchanges facilitate the investors to decide his investment priorities by providing him the basket of different kinds of securities of different industries and companies. He can sell stock of one company and buy a stock of another company through stock exchange whenever he wants. He can manage his investment portfolio to maximise his wealth.

6. Investment safety

Stock exchanges through their by-laws, Securities and Exchange Board of India (SEBI) guidelines, transparent procedures try to provide safety to the investment in industrial securities. Government has established the National Stock Exchange (NSE) and Over The Counter Exchange of India (OTCEI) for investors' safety. Exchange authorities try to curb speculative practices and minimise the risk for common investor to preserve his confidence.

7. Wide Marketability to Securities

Online price quoting system and online buying and selling facility have changed the nature and working of stock exchanges. Formerly, the dealings on stock exchanges were restricted to its head quarters. The investors across the country were absolutely in dark about the price fluctuations on stock exchanges due to the lack of information. But today due to Internet, on line quoting facility is available at the computers of investors. As a result, they can keep track of price fluctuations taking place on stock exchange every second during the working hours. Certain T.V. Channels like CNBC are fully devoted to stock market information and corporate news. Even other channels display the on line quoting of stocks. Thus, modern stock exchanges backed up by internet and information technology provide wide marketability to securities of the industries. Demat facility has revolutionised the procedure of transfer of securities and facilitated marketing.

8. Financial resources for public and private sectors

Stock Exchanges make available the financial resources available to the industries in public and private sector through various kinds of securities. Due to the assurance of liquidity, marketing support, investment safety assured through stock exchanges, the public issues of securities by these industries receive strong public response (resulting in oversubscription of issue).

9. Funds for Development Purpose

Stock exchanges enable the government to mobilise the funds for public utilities and public undertakings which take up the developmental activities like power projects, shipping, railways, telecommunication, dams & roads constructions, etc. Stock exchanges provide liquidity, marketability, price continuity and constant evaluation of government securities.

10. Indicator of Industrial Development

Stock exchanges are the symbolic indicators of industrial development of a nation. Productivity, efficiency, economic-status, prospects of each industry and every unit in an industry is reflected through the price fluctuation of industrial securities on stock exchanges. Stock exchange sensex and price fluctuations of securities of various companies tell the entire story of changes in industrial sector.

11. Barometer of National Economy

Stock exchange is taken as a Barometer of the economy of a country. Each economy is economically symbolized (indicators) by its most significant stock exchange. New York Stock Exchange, London Stock Exchange, Tokyo Stock Exchange and Bombay Stock Exchange are considered as barometers of U.S.A, United Kingdom, Japan and India respectively. At both national and international level these stock exchanges represent the progress and conditions of their economies.

Thus, stock exchange serves the nation in several ways through its diversified economic services which include imparting liquidity to investments, providing marketability, enabling evaluation and ensuring price continuity of securities.