The Study of Stock Market

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THE STUDY OF STOCK MARKET

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This my black book which i presented to Mumbai University for the bachelor in management studies (B.M.S) exteral viva held by the latter
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THE STUDY OF STOCK MARKET

1. 1.
THE STUDY OF STOCK EXCHANGE
1
PROJECT REPORT ON:
“THE STUDY OF STOCK MARKET”
SUBMITTED BY:
SHWETA SUDHAKARAN
ACHARYA
ROLL NO. : 01
SEMESTER V, T.Y.B.M.S
PROJECT GUIDE:
MS. ANJANA ASHOKAN
SUBMITTED TO:
UNIVERSITY OF MUMBAI
V.K.
KRISHNAMENON COLLEGE OF COMMERCE AND ECONOMICS
AND SHARAD DIGHE COLLEGE OF SCIENCE, BHANDUP (EAST),
MUMBAI-
400042
ACADEMIC YEAR:
2014-2015
2. 2.
2
ACKNOWLEDGEMENT
I take this opportunity to express my profound gratitude and deep regards to my
guide
MS.ANJANA ASHOKAN for her exemplary guidance, monitoring and
constant encouragement throughout the course of this thesis. The blessings, help
and
guidance given by her time to time shall carry me a long way in the journey of
life on which I am about to embark.
I also take the opportunity to express a deep
sense of gratitude to my friends and
teachers for their valuable information and guidance, which helped me in
completing this task through various stages.
Lastly, I
thank almighty, my parents, brother, sister and friends for their constant
encouragement without which this assignment would not be possible.
3. 3.
3
PREFACE
The successfulcompletion of this project was a unique experience for me as I got
an opportunity to visit
many places and also interact with various people, I
achieved a better knowledge about this project. The experience which I gained by
doing this project was
essential at this turning point of my career. This project is
being submitted which, whose detailed analysis of the research is undertaken by
me.
This project titled, “
THE STUDY OF THE STOCKMARKET “ is an attempt to
allow the reader to understand the StockMarket, Trading Of Stocks and Role
Played By
StockExchanges in the economy of India as well as globally.
4. 4.
4
DECLARATION
I, SHWETA ACHARYA, ROLLNO.1 Of V.K. KRISHNA MENON COLLEGE
Studying In
T.Y.B.M.S., hereby declare that I have successfully completed this
project on “THE STUDY OF STOCKMARKET” during the Academic Year
2014-2015. The
information submitted is true and original to best of my
knowledge.
DATE:
PLACE: MUMBAI ____________________
SHWETA ACHARYA
5. 5.
5
CERTIFICATE
I hereby certify that SHWETAACHARYA , a student of V.K.KRISHNA MENON
COLLEGE
studying in T.Y.B.M.S. has completed this project on “THE STUDY
OF STOCKMARKET” under my guidance for the academic year 2014-2015. The
information
permitted is true and original to the best of my knowledge.
___________________________
Mrs. Saroj Phadnis
(Principal)
____________________________
_______________________
Ms. Anjana Ashokan External supervisor
(Project Guide)
______________________
College seal DATE:
PLACE: MUMBAI
6. 6.
6
7. 7.
7
Objectives:
 To get a basic understanding of the products, principle investment, players and
functioning of the stock
market.
 To understand the terms and jargons used in the financial newspaper,
 To know the regulatory framework for Indian Stock market.
 To understand the
concept of stocks and stock market.
 To also get important lessons about the economy and financial responsibility.
 To learn about trading of stocks in the stock
exchanges.
 To get in depth study of Indian and other global stock markets.
 To organize stocks in a fair, transparent and competitive way
8. 8.
8
INDEX
SR NO. PARTICULARS PAGE NO.
01 EXECUTIVE SUMMARY 12
02 INTRODUCTION TO STOCK
MARKET
2.1. WHAT IS STOCK MARKET?
 CAPITAL MARKET.
 PRIMARY MARKET.
2.2. SECONDARY MARKET.
2.3. EXPLAINING STOCKS
AND STOCK MARKET.
2.4. TYPES OF STOCKS.
2.5. SHAREHOLDERS.
2.6. WHY DOES COMPANY ISSUE STOCKS?
2.7 ISSUE OF STOCKS.
2.8 HOW
ARE SHARE PRICES SET?
2.9 NEED OF STOCK MARKET
2.10 WHY BUY STOCK?
2.11 ADVANTAGES AND DISADVANTAGES OF STOCK
MARKET
FLOTATION.
13
03 HISTORY OF STOCK MARKET
3.1 HISTORY.
3.2 HISTORY OF INDIAN STOCK MARKET.
30
9. 9.
9
04 EMERGENCE OF THE STOCK EXCHANGES
4.1 NATIONAL STOCK EXCHANGE. (NSE)
4.2 BOMBAY
STOCK EXCHANGE. (BSE)
4.3 OVER THE COUNTER EXCHANGE OF
INDIA.(OTCEI)
4.4 OPERATIONAL FEATURES OF BSE AND NSE.
 MARKET
TIMINGS
 AUTOMATED TRADING SYSTEM
 MARKET SEGMENT
 SETTLEMENT CYCLE
 BROKERAGE AND OTHER TRANSACTION
COST
 THE ROLE OF STOCK EXCHANGE IN THE
ECONOMY
4.5 THE ROLE OF STOCK EXCHANGE IN THE
ECONOMY.
35
05 TRADING OF STOCKS
5.1. MERITS OF OWNING STOCK.
5.2. DEMERITS OF OWNING STOCK.
5.3. WHAT IS TRADING OF SHARES?
5.4. WHO IS A STOCKBROKER?
5.5.
ROLE OF STOCKBROKER IN A STOCKMARKET.
5.6. METHOD OF TRADING IN STOCK EXCHANGES
AND THE TYPES OF BROKERS.

SPECIALISTS
 FLOOR BROKERS
 STOCK BROKERS/FINANCIAL ADVISORS
 DAY TRADERS
 CASUAL TRADERS
51
10. 10.
10
 ONLINE TRADERS
5.7. MARKET CORRECTION
5.8. MARKET TREND
5.9. BULLS AND BEARS
5.10.
OTHER ANIMALS ON THE FARM
5.11. BULLISH AND BEARISH BEHAVIOR
5.12. HOW TO READ A STOCK TABLE/QUOTE?
5.13. WHAT IS A
STOCK CHART?
5.14. TYPES OF STOCK CHART
5.15. WHAT CAUSES STOCK PRICES TO CHANGE?
5.16. STRATEGIES FOR INVESTING IN STOCK
5.17. RISKS THAT EVERY STOCK FACES
06 THE INDIAN STOCK MARKET
6.1. REGULATORS IN THE STOCK MARKET
6.2. WHAT IS STOCK
INDEX
6.3. TYPES OF STOCK INDICES
6.4. INDIAN STOCK INDICES
 NIFTY
 SENSEX
6.5. CALCULATE BROKERAGE RATES AND TAXES
87
07
GLOBAL STOCK MARKET
7.1. WORLD MARKETS
7.2. TOP 11 IMPORTANT STOCK EXCHANGES
GLOBALLY
7.4. MAJOR STOCK EXCHANGES
(TOP 21 BY MARKET
CAPITALIZATION), AS AT 31 JUNE 2014 (MONTHLY
102
11. 11.
11
REPORTS, WORLD FEDERATION OF EXCHANGES)
7.5. NEWYORK STOCK EXCHANGE (NYSE)
7.6.
NATIONAL ASSOCIATION OF SECURITIES DEALERS
AUTOMATED QUOTATIONS (NASDAQ)
7.7. TOKYO STOCK EXCHANGE (TSE)
08
INTERVIEW 118
09 CONCLUSION 122
10 APPENDIX
10.1 10 BIGGEST FALL IN THE INDIAN STOCK MARKET
10.2 CURRENT NEWS:
 INDIA’S
STOCK MARKET RISES IN VOLATILE
ELECTION DAYTREND
 INDIA’S NIFTY FUTURES RISES AFTER INDEX AT
RECORD BEFORE EXPIRY
136
11 BIBILOGRAPHY 130
12. 12.
12
EXECUTIVE SUMMARY
In the present situation where stock market is going up and down, it is necessary to
invest
consciously in the market whatever it is, this is the study about the last two year function in stock
market which enables the investor in taking decision
regarding investment. This study tells the
factor which directly or indirectly affects the market and some basic information on stock
market for the new investors or
the students who have some interest in the stock market. The
objective of selecting the topic is to know about the market trends of the stock market and the
information related to the investment for future investors. The study of fluctuations of the stock
market makes the investor aquatinted with the factor affecting the
investment and stock prices
can be volatile and some analysts argue that this volatility is excessive. This is not easy to prove,
since it is difficult to assess certainty
about future earnings and dividend. Companies tend to
smooth dividends, so they will be less volatile than stock prices. Volatile stock prices do not have
a major
impact on consumption and capital spending since there is a good chance that price
movements in one direction may be reversed.
13. 13.
13
CHAPTER 1
INTRODUCTION
TO
STOCK MARKET
14. 14.
14
WHAT IS STOCK MARKET?
Definition of 'Stock Market'
The market in which shares of publicly held companies
are issued and traded either through
exchanges or over-the-counter markets. Also known as the equity market, the stock market is one
of the most vital components
of a free-market economy, as it provides companies with access to
capital in exchange for giving investors a slice of ownership in the company. The stock market
makes it possible to grow small initial sums of money into large ones, and to become wealthy
without taking the risk of starting a business or making the sacrifices
that often accompany a
high-paying career.
The stock market lets investors participate in the financial achievements of the companies whose
shares they hold. When
companies are profitable, stock market investors make money through
the dividends the companies pay out and by selling appreciated stocks at a profit called a
capital
gain. The downside is that investors can lose money if the companies whose stocks they hold
lose money, the stocks' prices goes down and the investor sells
the stocks at a loss.
15. 15.
15
CAPITAL MARKET
Definition of 'Capital Markets'
“Markets for buying and selling equity and debt instruments.
Capital markets channel savings
and investment between suppliers of capital such as retail investors and institutional investors,
and users of capital like businesses,
government and individuals. Capital markets are vital to the
functioning of an economy, since capital is a critical component for generating economic output.
Capital markets include primary markets, where new stock and bond issues are sold to investors,
and secondary markets, which trade existing securities.”
Capital
markets typically involve issuing instruments such as stocks and bonds for the medium-
term and long-term. In this respect, capital markets are distinct from money
markets, which refer
to markets for financial instruments with maturities not exceeding one year.
Capital markets have numerous participants including individual
investors, institutional investors
such as pension funds and mutual funds, municipalities and governments, companies and
organizations and banks and financial
institutions. Suppliers of capital generally want the
maximum possible return at the lowest possible risk, while users of capital want to raise capital
at the lowest
possible cost. The stock market falls under the Capital Market Structure.
The capital market is divided further into two markets:
 Primary market
 Secondary
market
16. 16.
16
PRIMARY MARKET
Definition of 'Primary Market'
“A market that issues new securities on an exchange.
Companies, governments and other groups
obtain financing through debt or equity based securities. Primary markets are facilitated by
underwriting groups, which
consist of investment banks that will set a beginning price range for
a given security and then oversee its sale directly to investors.“
Also known as "new issue
market" (NIM).
The primary markets are where investors can get first crack at a new security issuance. The
issuing company or group receives cash proceeds from
the sale, which is then used to fund
operations or expand the business. Exchanges have varying levels of requirements which must be
met before a security can be
sold.
Once the initial sale is complete, further trading is said to conduct on the secondary market,
which is where the bulk of exchange trading occurs each day.
Primary markets can see increased
volatility over secondary markets because it is difficult to accurately gauge investor demand for a
new security until several days
of trading have occurred.
There are three ways in which a company may raise equity capital in the primary market:
 PUBLIC ISSUE:
Issue of stock on a public
market rather than being privately funded by the companies own
promoter(s), which may not be enough capital for the business to start up, produce, or continue
running. By issuing stock publically, this allows the public to own a part of the company, though
not be a controlling factor.
 IPO: Intial Public Offer
Initial public
offering (IPO) or stock market launch is a type of public offering where shares
of stock in a company are sold to the general public, on a securities exchange, for the
first time.
An initial public offering, or IPO, is the first sale of stock by a company to the public. A
company can raise money by issuing either debt or equity. If the
company has never issued
equity to the public, it's known as an IPO.
Companies fall into two broad categories: private and public.
A privately held company has
fewer shareholders and its owners don't have to disclose much
information about the company. Anybody can go out and incorporate a company: just put in
some
money, file the right legal documents and follow the reporting rules of your jurisdiction.
Most small businesses are privately held. But large companies can be
private too. Did you know
that IKEA, Domino's Pizza and Hallmark Cards are all privately held?
It usually isn't possible to buy shares in a private company. You
can approach the owners about
investing, but they're not obligated to sell you anything. Public companies, on the other hand,
have sold at least a portion of
themselves to the public and trade on a stock exchange. This is
why doing an IPO is also referred to as "going public."
Public companies have thousands of
shareholders and are subject to strict rules and regulations.
17. 17.
17
They must have a board of directors and they must report financial information every quarter. In
the United States,
public companies report to the Securities and Exchange Commission (SEC). In
other countries, public companies are overseen by governing bodies similar to the
SEC. From an
investor's standpoint, the most exciting thing about a public company is that the stock is traded in
the open market, like any other commodity. If you
have the cash, you can invest. The CEO could
hate your guts, but there's nothing he or she could do to stop you from buying stock.
 RIGHTS ISSUES:
An issue of
rights to a company's existing shareholders that entitles them to buy additional shares
directly from the company in proportion to their existing holdings, within a
fixed time period. In
a rights offering, the subscription price at which each share may be purchased in generally at a
discount to the current market price. Rights are
often transferable, allowing the holder to sell
them on the open market. A rights issue is when a company issues its existing shareholders a
right to buy additional
shares in the company. The company will offer the shareholder a specific
number of shares at a specific price. The company will also set a time limit for the
shareholder to
buy the shares. The shares are often offered at a discounted price to encourage existing
shareholders to take the company up on their offer.
If a
shareholder does not take the company up on their rights issue then they have the option to
sell their rights on the stock market just as they would sell ordinary
shares, however their
shareholding in the company will weaken.
Companies with a poor cash flow will often use a rights issue to increase cash flow and pay off
existing debts. Rights issues however are sometimes issued by companies with healthy balance
sheets in order to fund research and development projects or to
purchase new companies.
Discounted shares issued by a company can be tempting but it is important to find out first the
reason for the rights issue of shares. A
company, for example, may be using the rights issue as a
quick cash fix to pay off debts masking the real reason for the company’s cash flow failing such
as bad
leadership. Caution is advised when offered with a rights issue.
 PREFERENTIAL ISSUE:
A preferential issue is an issue of shares or of convertible securities by
listed companies to a
select group of persons under Section 81 of the Companies Act, 1956 which is neither a rights
issue nor a public issue. This is a faster way for
a company to raise equity capital. The issuer
company has to comply with the Companies Act and the requirements contained in Chapter
pertaining to preferential
allotment in SEBI (DIP) guidelines which inter-alia include pricing,
disclosures in notice etc. Preferred stock is a different class than the better-known common
stock, with different characteristics. Thus, companies have reasons for issuing preferred stock
that may differ from the reasons they "go public" by issuing common
stock to everyday
investors. Preferred stock is still considered equity -- an ownership stake, rather than debt -- but
it often functions more like a bond than a share.
Preferred stock is so named because, on a
company's hierarchy of debts, it is favored over common stock -- that is, its owners are paid
before owners of common
shares. However, preferred stock normally does not convey voting
rights to owners as common shares do. Preferred stocks attract investors looking for dividends,
which provide owners with a fixed rate of return rather than returns that rise and fall with the
stock market. Thus, it acts more like a bond with its -- usually -- fixed
payout. Preferred shares
also provide the company with flexibility for other nondividend-related reasons. For instance,
they provide issuers with an extra ownership
option in addition to common stock and bonds. In
18. 18.
18
addition, because these shares are a cut above common stock, they can be used as incentives
during transactions
because they offer more security to the buyer and a fiscal guarantees to the
seller.
SECONDARY MARKET
Definition of 'Secondary Market'
“A market where
investors purchase securities or assets from other investors, rather than from
issuing companies themselves. The national exchanges - such as the NATIONAL
STOCK
EXCHANGE and the BOMBAY STOCK EXCHANGE are secondary markets.”
Secondary markets exist for other securities as well, such as when funds,
investment banks, or
entities such as Fannie Mae purchase mortgages from issuing lenders. In any secondary market
trade, the cash proceeds go to an investor
rather than to the underlying company/entity directly.
A newly issued IPO will be considered a primary market trade when the shares are first
purchased by
investors directly from the underwriting investment bank; after that any shares
traded will be on the secondary market, between investors themselves. In the primary
market
prices are often set beforehand, whereas in the secondary market only basic forces like supply
and demand determine the price of the security.
In the case of
assets like mortgages, several secondary markets may exist, as bundles of
mortgages are often re-packaged into securities like GNMA Pools and re-sold to
investors.
In the secondary market, securities are sold by and transferred from
one investor orspeculator to another. It is therefore important that the secondary
market be
highly liquid(originally, the only way to create this liquidity was for investors and speculators to
meet at a fixed place regularly; this is how stock
exchanges originated. As a general rule, the
greater the number of investors that participate in a given marketplace, and the greater the
centralization of that
marketplace, the more liquid the market.
Fundamentally, secondary markets mesh the investor's preference for liquidity (i.e., the investor's
desire not to tie up his or
her money for a long period of time, in case the investor needs it to deal
with unforeseen circumstances) with the capital user's preference to be able to use the
capital for
an extended period of time.
Accurate share price allocates scarce capital more efficiently when new projects are financed
through a new primary market
offering, but accuracy may also matter in the secondary market
because:
1) price accuracy can reduce the agency costs of management, and make hostile takeover a
less
risky proposition and thus move capital into the hands of better managers, and
2) accurate share price aids the efficient allocation of debt finance whether debt
offerings or
institutional borrowing.
19. 19.
19
EXPLAINING STOCKS AND STOCK MARKET
At some point, just about every company needs to raise money,
whether to open up a West Coast
sales office, build a factory, or hire a crop of engineers.
In each case, they have two choices:
1) Borrow the money, or
2) raise it
from investors by selling them a stake (issuing shares of stock) in the company.
When you own a share of stock, you are a part owner in the company with a claim
(however
small it may be) on every asset and every penny in earnings.
Individual stock buyers rarely think like owners, and it's not as if they actually have a say in
how
things are done.
Nevertheless, it's that ownership structure that gives a stock its value. If stockowners didn't have
a claim on earnings, then stock certificates
would be worth no more than the paper they're
printed on. As a company's earnings improve, investors are willing to pay more for the stock.
Over time, stocks in
general have been solid investments. That is, as the economy has grown, so
too have corporate earnings, and so have stock prices.
Since 1926, the average large
stock has returned close to 10% a year. If you're saving for
retirement, that's a pretty good deal -- much better than U.S. savings bonds, or stashing cash
under your
mattress.
Of course, "over time" is a relative term. As any stock investor knows, prolonged bear markets
can decimate a portfolio.
Since World War II, Wall Street
has endured several bear markets -- defined as a sustained
decline of more than 20% in the value of the Dow Jones Industrial Average.
Bull markets eventually
follow these downturns, but again, the term "eventually" offers small
sustenance in the midst of the downdraft.
The point to consider, then, is that investing must be
considered a long-term endeavor if it is to
be successful. In order to endure the pain of a bear market, you need to have a stake in the game
when the tables turn
positive.
20. 20.
20
TYPES OF STOCKS
There are two main types of stocks: common stock and preferred stock.
Common Stock
Common stock is, well, common. When people talk about stocks they are usually referring to
this type. In fact, the majority of stock is issued is in this form. We
basically went over features
of common stock in the last section. Common shares represent ownership in a company and a
claim (dividends) on a portion of profits.
Investors get one vote per share to elect the board
members, who oversee the major decisions made by management.
Over the long term, common stock, by means
of capital growth, yields higher returns than almost
every other investment. This higher return comes at a cost since common stocks entail the most
risk. If a
company goes bankrupt and liquidates, the common shareholders will not receive
money until the creditors, bondholders and preferred shareholders are paid.
Preferred Stock
Preferred stock represents some degree of ownership in a company but usually doesn't come with
the same voting rights. (This may vary depending
on the company.) With preferred shares,
investors are usually guaranteed a fixed dividend forever. This is different than common stock,
which has variable
dividends that are never guaranteed. Another advantage is that in the event of
liquidation, preferred shareholders are paid off before the common shareholder (but
still after
debt holders). Preferred stock may also be callable, meaning that the company has the option to
purchase the shares from shareholders at anytime for any
reason (usually for a premium).
Some people consider preferred stock to be more like debt than equity. A good way to think of
these kinds of shares is to see them
as being in between bonds and common shares.
Common and preferred are the two main forms of stock; however, it's also possible for
companies to customize
different classes of stock in any way they want. The most common
reason for this is the company wanting the voting power to remain with a certain group;
therefore, different classes of shares are given different voting rights. For example, one class of
shares would be held by a select group who are given ten votes per
share while a second class
would be issued to the majority of investors who are given one vote per share.
When there is more than one class of stock, the classes are
traditionally designated as Class A
and Class B. Berkshire Hathaway (ticker: BRK), has two classes of stock. The different forms
are represented by placing the
letter behind the ticker symbol in a form like this: "BRKa, BRKb"
or "BRK.A, BRK.B"
21. 21.
21
SHAREHOLDERS
Definition of 'Shareholder'
“Any person, company or other institution that owns at least one
share of a company’s stock.
Shareholders are a company's owners. They have the potential to profit if the company does well,
but that comes with the potential to
lose if the company does poorly. A shareholder may also be
referred to as a "stockholder".”
Unlike the owners of sole proprietorships or partnerships, corporate
shareholders are not
personally liable for the company’s debts and other obligations. Also, corporate shareholders do
not play a major role in running the company.
The board of directors and executive management
perform that function. Common stockholders are, however, able to vote on corporate matters,
such as who sits on
the board of directors and whether a proposed merger should go through
(preferred stockholders usually do not have voting rights). They also benefit when the
company
performs well and its share price increases, and they have the right to trade their shares on a
stock exchange, which makes stock a highly liquid
investment.
Shareholders do have rights, which are defined in the corporation’s charter and bylaws. They can
inspect the company’s books and records, sue the
corporation for misdeeds of the directors and
officers, and if the company liquidates, they have a right to a share of the proceeds. However,
creditors, bondholders
and preferred stockholders have precedence over common stockholders in
a liquidation. Shareholders also have a right to receive a portion of any dividends the
company
declares.
Shareholders can attend the corporation’s annual meeting to learn about the company’s
performance, vote on who sits on the board of directors
and other matters. They can also listen to
the meeting via conference call and vote by proxy through the mail or online. To learn more
about a company’s policies
toward shareholders, consult the company’s corporate governance
policies.
22. 22.
22
WHY DOES COMPANY ISSUE STOCKS?
Why would the founders share the profits with thousands of people
when they could keep profits
to themselves? The reason is that at some point every company needs to "raise money". To do
this, companies can either borrow it
from somebody or raise it by selling part of the company,
which is known as issuing stock.
A company can borrow by taking a loan from a bank or by issuing
bonds. Both methods come
under "debt financing". On the other hand, issuing stock is called “equity financing”. Issuing
stock is advantageous for the company
because it does not require the company to pay back the
money or make interest payments along the way.
All that the shareholders get in return for their money is
the hope that the shares will someday be
worth more than what they paid for them. The first sale of a stock, which is issued by the private
company itself, is called
the initial public offering (IPO).
It is important that you understand the distinction between a company financing through debt and
financing through equity. When
you buy a debt investment such as a bond, you are guaranteed
the return of your money (the principal) along with promised interest payments.
This isn't the case
with an equity investment. By becoming an owner, you assume the risk of the
company not being successful - just as a small business owner isn't guaranteed a
return, neither is
a shareholder. Shareholders earn a lot if a company is successful, but they also stand to lose their
entire investment if the company isn't successful.
A sample of a stock certificate
23. 23.
23
ISSUE OF STOCK
Corporations issue shares of stock to raise money for their business. The shares that are issued
represent the amount of money invested by the shareholders in the company. Shareholders have
an ownership stake in the company and enjoy certain rights such as
voting rights and the receipt
of dividends. Therefore it is very important to consider how to issue stock when organizing your
corporation.
Determine how much
stock the corporation will be authorized to issue. The Articles of
Incorporation will set out the maximum number of shares that the corporation can issue to
potential
shareholders. This does not mean that the corporation must issue all of those shares.
New corporations will likely hold back shares so that, if necessary, it can raise
capital at a later
date.
Set forth the value of the shares that will be issued. The value of each share should be
proportionate to the company's net worth. The shares
may be marked with a par amount
24. 24.
24
establishing the minimum amount that the shares can be purchased from the corporation or with
a no par amount
having no set price for purchase of the share of stock. The corporation must
receive consideration of some value for each share issued.
Determine the class of the
shares to be issued. A corporation will generally issue common
stock or preferred stock where holders of common stock would get a dividend following those of
preferred stock.
Determine how many shares the corporation will initially issue. Generally this depends on
the size of the corporation. In a small corporation the
initial shares may be based upon the
contribution that the shareholders are making to the business. This may be the most important
factor when issuing stocks as the
original owner or largest contributor may want to have
controlling (51%) interest in the company. There is no requirement on the number of shares that
have to be
issued. The corporation may issue as few as 1 share of stock. There may be an issue as
to the amount of capitalization that the corporation needs. Some states may
require that the
corporation have a minimum amount of assets, know as capitalization, before starting its
operation.
25. 25.
25
Make sure you are in compliance with state and federal securities law. The amount of
compliance again may be
affected by the size of the corporation. Small corporations with only
family members participating in the business and closed corporations with a limited number of
shares may not have to register their securities offerings with the applicable state or federal
agencies. Such registration is likely with a public offering.
Draft the
Stock Subscription Agreement. Stock subscription agreements should include the
share price, number of shares purchased and the transaction details. The
certificates should be
professionally printed as hard copies and be issued upon the shareholder's purchase.
26. 26.
26
HOW ARE SHARE PRICES SET?
When a company goes public though an initial public offering (IPO), an
investment bank
evaluates the company's current and projected performance and health to determine the value of
the IPO for the business. The bank can do this by
comparing the company with the IPO of
another similar company, or by calculating the net present value of the firm. The company and
the investment bank will
meet with investors to help determine the best IPO price through a
series of road shows. Finally, after the valuation and road shows, the firm must meet with the
exchange, which will determine if the IPO price is fair.
Once trading starts, share prices are largely determined by the forces of supply and demand. A
company that
demonstrates long-term earnings potential may attract more buyers, thereby
enjoying an increase in share prices. A company with a poor outlook, on the other hand,
may
attract more sellers than buyers, which can result in lower prices. In general, prices rise during
periods of increased demand - when there are more buyers than
sellers. Prices fall during periods
of increased supply - when there are more sellers than buyers. A continuous rise in prices is
known as an uptrend, and a continuous
drop in prices in called a downtrend. Sustained uptrends
form a "bull" market and sustained downtrends are called "bear" markets.
Other factors can affect prices
and cause sudden or temporary changes in price. Some examples
of this include earnings reports, political events, financial reports and economic news. Not all
news or reports affect all securities. For example, the stocks of companies engaged in the gas and
oil industry may react to the weekly petroleum status report from
the U.S. Energy Information
Administration (the "EIA report").
Stock prices can also be driven by what is known as herd instinct, which is the tendency for
people
to mimic the action of a larger group. For example, as more and more people buy a stock,
pushing the price higher and higher, other people will jump on board,
assuming that all the other
investors must be right (or that they know something not everyone else knows). There may be no
fundamental or technical support for
the price increase, yet investors continue to buy because
others are doing so and they are afraid of missing out. This is one of many phenomena studied
under the
umbrella of behavioral finance.
NEED OF STOCK MARKET
Stock market is an important part of the economy of a country. The stock market plays a play a
pivotal role in the growth of the industry and commerce of the country that eventually affects the
economy of the country to a great extent. That is reason that the
government, industry and even
the central banks of the country keep a close watch on the happenings of the stock market. The
stock market is important from both
the industry’s point of view as well as the investor’s point of
view.
27. 27.
27
Whenever a company wants to raise funds for further expansion or settling up a new business
venture, they have to
either take a loan from a financial organization or they have to issue shares
through the stock market. In fact the stock market is the primary source for any company
to raise
funds for business expansions. If a company wants to raise some capital for the business it can
issue shares of the company that is basically part ownership
of the company. To issue shares for
the investors to invest in the stocks a company needs to get listed to a stocks exchange and
through the primary market of the
stock exchange they can issue the shares and get the funds for
business requirements. There are certain rules and regulations for getting listed at a stock
exchange
and they need to fulfill some criteria to issue stocks and go public. The stock market is
primarily the place where these companies get listed to issue the shares and
raise the fund. In
case of an already listed public company, they issue more shares to the market for collecting
more funds for business expansion. For the
companies which are going public for the first time,
they need to start with the Initial Public Offering or the IPO. In both the cases these companies
have to go
through the stock market.
This is the primary function of the stock exchange and thus they play the most important role of
supporting the growth of the industry and
commerce in the country. That is the reason that a
rising stock market is the sign of a developing industrial sector and a growing economy of the
country.
Of course
this is just the primary function of the stock market and just an half of the role that the
stock market plays. The secondary function of the stock market is that the
market plays the role
of a common platform for the buyers and sellers of these stocks that are listed at the stock
market. It is the secondary market of the stock
exchange where retail investors and institutional
investors buy and sell the stocks. In fact it is these stock market traders who raise the fund for the
businesses by
investing in the stocks.
For investing in the stocks or to trade in the stock the investors have to go through the brokers of
the stock market. Brokers actually execute
the buy and sell orders of the investors and settle the
deals to keep the stock trading alive. The brokers basically act as a middle man between the
buyers and sellers.
Once the buyer places a buy order in the stock market the brokers finds a
seller of the stock and thus the deal is closed. All these take place at the stock market and
it is the
demand and supply of the stock of a company that determines the price of the stock of that
particular company.
So the stock market is not only providing the
much required funds for boosting the business, but
also providing a common place for stock trading. It is the stock market that makes the stocks a
liquid asset unlike
the real estate investment. It is the stock market that makes it possible to sell
the stocks at any point of time and get back the investment along with the profit. This
makes the
stocks much more liquid in nature and thereby attracting investors to invest in the stock market.
28. 28.
28
WHY BUY STOCK?
Ownership has its privileges
As a shareholder, you have some basic rights. You can vote for
or against the candidates who’ve
been nominated to the company’s board of directors. They’re the people who set company policy
and choose the chief executive
who runs the business. You can also vote for or against proposals
the directors or other shareholders make to influence what happens at the company and how it is
managed. You also have the right to sell your stock at any time — although you may choose to
hold onto it for years.
Let’s be honest. Shareholder rights aren’t the
reason you buy stock. The reason is to make money
by investing in companies you believe will make money. In the language of investing, you’re
seeking a positive
return.
Here are some ideas that may help you have a positive return:
The company that issued the stock may pay a dividend, or portion of its earnings, to its
shareowners on a regular basis. You can reinvest the dividends to build your portfolio or you can
use it as income.
A stock’s price may go up while you own it. If it
does, you can sell some or all of your shares for
a profit if you want to — remember one right of ownership is the right to sell — or you can hold
onto it, which
increases the value of your portfolio. Investing in stock has risks, though. You may
have a negative return in some years rather than a positive one. That could
reduce your income
and the value of your portfolio.
Here are some of the possible risks you face:
Companies aren’t required to pay a dividend even if they have a
profit. And companies that
normally pay a dividend may reduce it or eliminate it entirely if times are tough. It’s their
decision, though investors don’t like it.
Sometimes stock prices go down instead of up, so you could lose money if you sold when your
stock’s price dropped. (Why do prices go down? Sometimes the
whole stock market loses steam.
Sometimes a company hits a rough patch. Sometimes investors get nervous and sell.)
If a company goes out of business, as some
do, you could lose everything you’d invested in its
stock — if you hadn’t sold your shares in time.
If you can lose money, why would you risk buying stock? The
reason is that over time, stocks as
a group — though not every stock on its own — has produced higher returns than other types of
investments. Of course, there are
no guarantees that the particular stocks you pick will produce
higher returns, or any return at all on your investment.
29. 29.
29
ADVANTAGES AND DISADVANTAGES OF STOCK MARKET
FLOTATION
Even if your business is suited to
flotation, it may not be the right choice for you. Being a public
company can present a range of benefits to your business, but there are also issues that might
require
careful consideration.
The benefits of stock market flotation could include:
 giving access to new capital to develop the business
 making it easier for you and
other investors - including venture capitalists - to realise
their investment
 allowing you to offer employees extra incentives by granting share options - this can
encourage and motivate your employees to work towards long-term goals
 placing a value on your business
 increasing your public profile, and providing
reassurance to your customers and suppliers
 allowing you to do business - eg acquisitions - by using quoted shares as currency
 creating a market for the
company's shares
However, you should also consider the following potential problems:
 Market fluctuations - your business may become vulnerable to market
fluctuations
beyond your control - including market sentiment, economic conditions or developments
in your sector.
 Cost - the costs of flotation can be
substantial and there are also ongoing costs of being a
public company, such as higher professional fees.
 Responsibilities to shareholders - in return for their
capital, you will have to consider
shareholders' interests when running the company - which may differ from your own
objectives.
 The need for transperancy -
public companies must comply with a wide range of
additional regulatory requirements and meet accepted standards of corporate governance
including
transperancy, and needing to make announcements about new developments.
 Demands on the management team - managers could be distracted from running the
business during the flotation process and through needing to deal with investors
afterwards.
 Investor relations - to maximise the benefits of being a public
company and attract further
investor interest in shares, you will need to keep investors informed.
 Employees may become demotivated - if shares are only offered
to selected employees,
there could be resentment. Shareholding employees could feel that there is little left to
work for if they are sitting on valuable shares.
30. 30.
30
CHAPTER 2
HISTORY
31. 31.
31
HISTORY
During the Roman Republic, the state contracted (leased) out many of its services to private
companies.
These government contractors were called publicani, or societas publicanorum as
individual company. These companies were similar to modern corporations, or
joint-stock
companies more specifically, in couple of aspects. They issued shares called partes (for large
cooperatives) and particulae which were small shares that
acted like today's over-the-counter
shares.[ Polybius mentions that “almost every citizen” participated in the government
leases. There is also an evidence that the
price of stocks fluctuated. The great Roman orator
Cicero speaks of partes illo tempore carissimae, which means “share that had a very high price
at that time." This
implies a fluctuation of price and stock market behavior in Rome.
One of the earliest stock by Vereenigde Oostindische Compagnie, VOC,
Around 1250 in France
at Toulouse, 96 shares of the Société des Moulins du Bazacle, or Bazacle
Milling Company were traded at a value that depended on the profitability of the mills the
society owned. As early as 1288, the Swedish mining and forestry products company Stora has
documented a stock transfer, in which that the Bishop of Västerås
acquired a 12.5% interest in
the mine (or more specifically, the mountain in which the copper resource was available, Great
Copper Mountain) in exchange for an
estate.
The earliest recognized joint-stock company in modern times was the English (later British) East
India Company, one of the most famous joint-stock
companies. It was granted an English Royal
Charter by Elizabeth I on December 31, 1600, with the intention of favouring trade privileges
in India. The Royal
Charter effectively gave the newly created Honourable East India
Company (HEIC) a 15-year monopoly on all trade in the East Indies. The Company transformed
from a commercial trading venture to one that virtually ruled India as it acquired auxiliary
governmental and military functions, until its dissolution.
32. 32.
32
The East India Company's flag initially had the flag of England, St. George's Cross, in the
corner.
Soon afterwards,
in 1602, the Dutch East India Company issued the first shares that were made
tradeable on the Amsterdam Stock Exchange, an invention that enhanced the ability
of joint-
stock companies to attract capital from investors as they now easily could dispose of their shares.
The Dutch East India Company became the first
multinational corporation and the first
megacorporation. Between 1602 and 1796 it had traded 2.5 million tons of cargo with Asia on
4,785 ships and had sent a
million Europeans to work in Asia, surpassing all other rivals.
The innovation of joint ownership made a great deal of Europe's economic growth possible
following
the Middle Ages. The technique of pooling capital to finance the building of ships, for
example, made the Netherlands a maritime superpower. Before adoption of
the joint-stock
corporation, an expensive venture such as the building of a merchant ship could be undertaken
only by governments or by very wealthy individuals
or families.
Economic historians find the Dutch stock market of the 17th century particularly interesting:
there is clear documentation of the use of stock futures,
stock options, short selling, the use of
credit to purchase shares, a speculative bubble that crashed in 1695, and a change in fashion that
unfolded and reverted in
time with the market (in this case it was headdresses instead
of hemlines). Dr. Edward Stringham also noted that the uses of practices such as short selling
continued
to occur during this time despite the government passing laws against it. This is
unusual because it shows individual parties fulfilling contracts that were not legally
enforceable
and where the parties involved could incur a loss. Stringham argues that this shows that contracts
can be created and enforced without state sanction or,
in this case, in spite of laws to the
contrary.
33. 33.
33
HISTORY OF THE INDIAN STOCK MARKET - THE ORIGIN
One of the oldest stock markets in Asia, the
Indian Stock Markets have a 200 years old history.
 18th Century East India Company was the dominant institution and by end of the
century, busuness in its loan
securities gained full momentum.
 In 1830's Business on corporate stocks and shares in Bank and Cotton presses
started in Bombay. Trading list by the end of
1839 got broader.
 1840's Recognition from banks and merchants to about half a dozen brokers
 1850's Rapid development of commercial enterprise saw
brokerage business attracting
more people into the business
 1860's The number of brokers increased to 60
 1860-61 The American Civil War broke out which
caused a stoppage of cotton
supply from United States of America; marking the beginning of the "Share Mania" in
India
 1862-63 The number of brokers
increased to about 200 to 250
 1865 A disastrous slump began at the end of the American Civil War (as an example,
Bank of Bombay Share which had touched
Rs. 2850 could only be sold at Rs. 87)
 Pre-Independance Scenario - Establishment of Different Stock Exchanges
 1874 With the rapidly developing share
trading business, brokers used to gather at a
street (now well known as "Dalal Street") for the purpose of transacting business.
 1875 "The Native Share and Stock
Brokers' Association" (also known as "The Bombay
Stock Exchange") was established in Bombay
 1880's Development of cotton mills industry and set up of
many others
 1894 Establishment of "The Ahmedabad Share and Stock Brokers' Association"
 1880 - 90's Sharp increase in share prices of jute industries in
1870's was followed by
a boom in tea stocks and coal
 1908 "The Calcutta Stock Exchange Association" was formed
 1920 Madras witnessed boom and
business at "The Madras Stock Exchange" was
transacted with 100 brokers.
 1923 When recession followed, number of brokers came down to 3 and the
Exchange
was closed down
 1934 Establishment of the Lahore Stock Exchange
 1936 Merger of the Lahoe Stock Exchange with the Punjab Stock Exchange

1937 Re-organisation and set up of the Madras Stock Exchange Limited (Pvt.) Limited
led by improvement in stock market activities in South India with
establishment of new
textile mills and plantation companies
 1940 Uttar Pradesh Stock Exchange Limited and Nagpur Stock Exchange Limited was
established

1944 Establishment of "The Hyderabad Stock Exchange Limited"
 1947 "Delhi Stock and Share Brokers' Association Limited" and "The Delhi Stocks and
Shares
Exchange Limited" were established and later on merged into "The Delhi Stock
Exchange Association Limited"
34. 34.
34
 Post Independance Scenario
 The depression witnessed after the Independance led to closure of a lot of
exchanges in
the country. Lahore Estock Exchange was closed down after the partition of India, and
later on merged with the Delhi Stock Exchange. Bnagalore
Stock Exchange Limited was
registered in 1957 and got recognition only by 1963. Most of the other Exchanges were in
a miserable state till 1957 when they
applied for recognition under Securities Contracts
(Regulations) Act, 1956. The Exchanges that were recognized under the Act were:
 Bombay
 Calcutta

Madras
 Ahmedabad
 Delhi
 Hyderabad
 Bangalore
 Indore
Many more stock exchanges were established during 1980's, namely:
 Cochin Stock
Exchange (1980)
 Uttar Pradesh Stock Exchange Association Limited (at Kanpur, 1982)
 Pune Stock Exchange Limited (1982)
 Ludhiana Stock Exchange
Association Limited (1983)
 Gauhati Stock Exchange Limited (1984)
 Kanara Stock Exchange Limited (at Mangalore, 1985)
 Magadh Stock Exchange
Association (at Patna, 1986)
 Jaipur Stock Exchange Limited (1989)
 Bhubaneswar Stock Exchange Association Limited (1989)
 Saurashtra Kutch Stock
Exchange Limited (at Rajkot, 1989)
 Vadodara Stock Exchange Limited (at Baroda, 1990)
 Coimbatore Stock Exchange
 Meerut Stock Exchange
At present,
there are twenty one recognized stock exchanges in India which does not include the
Over The Counter Exchange of India Limited.
35. 35.
35
CHAPTER 3
EMERGENCE OF
THE STOCK
EXCHANGES
36. 36.
36
Now, I will mention in short on the main stock exchanges of India, i.e. NSE
(National Stock Exchange), BSE
(Bombay Stock Exchange) and OTCEI (Over The Counter
Exchange Of India). Though OTCEI plays a part of the key role, NSE and BSE are the most
important
Stock Exchanges in India, which dominates and influences the Indian economy.
NATIONAL STOCK EXCHANGE (NSE)
The National Stock Exchange (NSE) is
India's leading stock exchange covering various cities
and towns across the country. NSE was set up by leading institutions to provide a modern, fully
automated
screen-based trading system with national reach. The Exchange has brought about
unparalleled transparency, speed & efficiency, safety and market integrity. It has
set up facilities
that serve as a model for the securities industry in terms of systems, practices and procedures.
NSE has played a catalytic role in reforming the
Indian securities market in terms of
microstructure, market practices and trading volumes. The market today uses state-of-art
information technology to provide an
efficient and transparent trading, clearing and settlement
mechanism, and has witnessed several innovations in products & services viz. demutualisation of
stock
exchange governance, screen based trading, compression of settlement cycles,
dematerialisation and electronic transfer of securities, securities lending and
borrowing,
professionalisation of trading members, fine-tuned risk management systems, emergence of
clearing corporations to assume counterparty risks, market
of debt and derivative instruments
and intensive use of information technology. The National Stock Exchange of India
Ltd. (NSE) located in the financial capital of
India, Mumbai. National Stock Exchange (NSE)
was established in the mid 1990s as a demutualised electronic exchange. NSE provides a
modern, fully automated
screen-based trading system, with over two lakh trading terminals,
through which investors in every nook and corner of Indiacan trade.
NSE has a market
capitalisation of more than US$1.5 trillion and Number of securities (equities
segment) available for trading are 3,091 as on June 2014.[2]Though a number of other
exchanges
exist, NSE and the Bombay Stock Exchange are the two most significant stock exchanges in
India, and between them are responsible for the vast
majority of share transactions. NSE's
flagship index, the S&P CNX NIFTY, is used extensively by investors in India and around the
world to take exposure to the
Indian equities market.
NSE was started by a clutch of leading Indian financial institutions at the behest of the
Government of India to bring transparency to the
Indian market, and has a diversified
shareholding comprising domestic and global investors. The domestic investors includes Life
Insurance Corporation of India,
GIC, State Bank of India and Infrastructure Development
Finance Company (IDFC) Ltd, while the foreign investors include MS Strategic (Mauritius)
Limited,
Citigroup Strategic Holdings Mauritius Limited, Tiger Global Five Holdings and
Norwest Venture Partners X FII-Mauritius. It offers trading, clearing and
settlement services in
equity, debt and equity derivatives. It is India's largest exchange, globally in cash market trades,
in currency trading and index options. As on
June 2013, NSE has 1673 VSAT terminals and 2720
leaselines, spread over more than 2000 cities across India.
37. 37.
37
The exchange was incorporated in 1992 as a tax-paying company and was recognized as a stock
exchange in 1993
under the Securities Contracts (Regulation) Act, 1956, when Mr. P. V.
Narasimha Rao was the Prime Minister of India and Dr. Manmohan Singh was the Finance
Minister. NSE commenced operations in the Wholesale Debt Market (WDM) segment in June
1994. The Capital market (Equities) segment of the NSE commenced
operations in November
1994, while operations in the Derivatives segment commenced in June 2000.
Trading at NSE
 Fully automated screen-based trading
mechanism
 Strictly follows the principle of an order-driven market
 Trading members are linked through a communication network
 This network allows
them to execute trade from their offices
 The prices at which the buyer and seller are willing to transact will appear on the screen
 When the prices match the
transaction will be completed
 A confirmation slip will be printed at the office of the trading member
A PHOTO OF NATIONAL STOCK EXCHANGE
Advantages of trading at NSE
 Integrated network for trading in stock market of India
 Fully automated screen based system that provides higher degree of
transparency
 Investors can transact from any part of the country at uniform prices
 Greater functional efficiency supported by totally computerized network.
38. 38.
38
History and milestone
Here is the latest history and milestone of NSE (2011-2014):
March 24, 2014
Commencement of trading of CNX NIFTYFutures on OSE.
February 26, 2014 NSE Launches NVIX Futures – Futures on India VIX index.
January 21, 2014 NSE
Launches ‘NSE Bond Futures II’
May 13, 2013 NSE launches the first dedicated Debt Platform on the Exchange
January 10, 2013 Agreement on Launch of S&P
CNX NIFTYFutures in Japan
January 03, 2013 NSCCL Rated CCR AAA for fifth consecutive year
Septemebr 18, 2012 NSE launches SME operations
June 27,
2012
NSE launches financial literacy initiative ' Jagruti' in Mohali, in partnership with India
Post
May 03, 2012 Futures and Options contracts on FTSE 100
March
22, 2012 NSE and India Post start Unique Financial Inclusion Initiative "Jagruti"
March 14, 2012 NSE launches “EMERGE” - SME Platform
December 2011
NSCCL Rated “CCR AAA” for fourth consecutive year - 28th Dec 2011
September 2011 Launch of derivatives on CNX PSE and CNX Infrastructure Indices
August 2011 Launch of derivatives on Global Indices
July, 2011 Commencement of trading in 91 Day GOI Treasury Bill - Futures
January, 2011 NSE receives
"Financial Inclusion" Award.
BOMBAY STOCK EXCHANGE (BSE)
The Bombay Stock Exchange is the oldest exchange in Asia. It traces its history to 1855,
when
four Gujarati and one Parsi stockbroker would gather under banyan trees in front of Mumbai's
Town Hall. The location of these meetings changed many times
as the number of brokers
constantly increased. The group eventually moved to Dalal Street in 1874 and in 1875 became an
official organization known as "The
Native Share & Stock Brokers Association".
On 31 August 1957, the BSE became the first stock exchange to be recognized by the Indian
Government under the
Securities Contracts Regulation Act. In 1980, the exchange moved to
the Phiroze Jeejeebhoy Towers at Dalal Street, Fort area. In 1986, it developed the BSE
SENSEX index, giving the BSE a means to measure overall performance of the exchange. In
39. 39.
39
2000, the BSE used this index to open its derivatives market, trading SENSEX futures contracts.
The development
of SENSEX options along with equity derivatives followed in 2001 and 2002,
expanding the BSE's trading platform. Established in 1875, BSE Ltd. (formerly
known as
Bombay Stock Exchange Ltd. and established as "The Native Share and Stock Brokers'
Association") is one of Asia’s fastest stock exchanges, with a
speed of 200 microseconds and
one of India’s leading exchange groups. BSE is a corporatized and demutualised entity, with a
broad shareholder-base that includes
two leading global exchanges, Deutsche Bourse and
Singapore Exchange, as strategic partners. BSE provides an efficient and transparent market for
trading in
equity, debt instruments, derivatives, and mutual funds. It also has a platform for
trading in equities of small-and-medium enterprises (SME). Over the past 139
years, BSE has
facilitated the growth of the Indian corporate sector by providing an efficient capital-raising
platform.
More than 5000 companies are listed on BSE,
making it the world's top exchange in terms of
listed members. The companies listed on BSE Ltd. command a total market capitalization of
USD 1.51 Trillion as of
May 2014.[1]It is also one of the world’s leading exchanges (3rd largest
in March 2014) for Index options trading (Source: World Federation of Exchanges).
BSE
also provides a host of other services to capital market participants, including risk
management, clearing, settlement, market data services, and education. It has a
global reach with
customers around the world and a nation-wide presence. BSE systems and processes are
designed to safeguard market integrity, drive the growth
of the Indian capital market, and
stimulate innovation and competition across all market segments. BSE is the first exchange in
India and the second in the world to
obtain an ISO 9001:2000 certification and the Information
Security Management System Standard BS 7799-2-2002 certification for its On-Line trading
System
(BOLT). It operates one of the most respected capital market educational institutes in the
country (the BSE Institute Ltd.). BSE also provides depository services
through its Central
Depository Services Ltd. (CDSL) arm.
BSE’s popular equity index - the S&P BSE SENSEX (Formerly SENSEX) - is India's most
widely
tracked stock market benchmark index. It is traded internationally on the EUREX as well
as leading exchanges of the BRCS nations (Brazil, Russia, China and
South Africa). On
Tuesday, 19 February 2013 BSE has entered into Strategic Partnership with S&P DOW JONES
INDICES and the SENSEX has been renamed as
"S&P BSE SENSEX".
40. 40.
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Advantages of trading at BSE
 Historically an open outcry floor trading exchange, the Bombay Stock Exchange
switched to an electronic trading system developed by CMC Ltd in 1995. It took the
exchange only fifty days to make this transition. This automated, screen-based
trading platform called BSE On-line trading (BOLT) had a capacity of 8 million orders
per day. The BSE has also introduced the world's first centralized exchange-
based
internet trading system, BSEWEBx.co.in to enable investors anywhere in the world to
trade on the BSE platform.
History and milestones:
Here is the latest
history and milestone of NSE (2011-2014):
 17 November 2011 Maharashtra and United Kingdom Environment Ministers launched
Concept Note for BSE
Carbon Index
 30 December 2011, picks up a stake in the proxy advisory firm, Institutional Investor
Advisory Services India Limited (IiAS)
 7 January 2011
BSE Training Institute Ltd. with IGNOU launched India's first 2 year
full-time MBA programme specialising in Financial Market
 15 January 2011 Co-location
facility at BSE - tie up with Netmagic.com
 22 February 2012 Launch of BSE-GREENEX to promote investments in Green India
 13 March 2012 Launch of
BSE - SME Exchange Platform
 30 March 2012 BSE launched trading in BRICSMART indices derivatives
 19 February 2013 - SENSEX becomes S&P
SENSEX as BSE ties up with Standard and
Poor's to use the S&P brand for Sensex and other indices.[3]
 28 November 2013 Launch of Currency Derivatives
(BSE CDX)
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 28 January 2014 Launch of Interest Rate Futures (BSE –IRF)
 11 Feb 2014 Launch of Institutional Trading
Platform on BSE SME
 07 Apr 2014 Launch of Equity Segment on BOLT Plus with Median Response Time of
200
OVER THE COUNTER EXCHANGE OF
INDIA (OTCEI)
The OTC Exchange Of India (OTCEI), also known as the Over-the-Counter Exchange of India,
is based in Mumbai, Maharashtra. An electronic
stock exchange based in India that is comprised
of small- and medium-sized firms looking to gain access to the capital markets. Like electronic
exchanges in the
U.S. such as the Nasdaq, there is no central place of exchange and all trading is
done through electronic networks.
It is India's first exchange for small companies, as
well as the first screen-based nationwide stock
exchange in India. OTCEI was set up to access high-technology enterprising promoters in raising
finance for new
product development in a cost-effective manner and to provide a transparent and
efficient trading system to investors.
OTCEI is promoted by the Unit Trust of
India, the Industrial Credit and Investment Corporation
of India, the Industrial Development Bank of India, the Industrial Finance Corporation of India,
and other
institutions, and is a recognised stock exchange under the SCRAct.
OTC Exchange Of India also known as Over-the-Country Exchange of India or OTCEI was set
up to access high-technology enterprising promoters in raising finance for new product
development in a cost effective manner and to provide transparent and
efficient trading system to
the investors.
The OTC Exchange Of India was founded in 1990 under the Companies Act 1956 and was
recognized by the Securities
Contracts Regulation Act, 1956 as a stock exchange.
Features of OTCEI:-
· Introduced Screen Based trading for the first time in Indian Stock market
· Trading
takes place through a network of computers of over the counter (OTC) dealers
located at several places, linked to central OTC computers.
· All the activities of
OTC trading process was fully computerized.
Services of OTC Exchange of India
OTC Exchange Of India introduced certain new concepts in the Indian trading
system:
 screen based nationwide trading known as OTCEI Automated Securities Integrated
System or OASIS
 Market Making
 Sponsorship of companies

Trading done in share certificates
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 Weekly Settlement Cycle
 Short Selling
 Demat trading through National Securities Depository Limited for
convenient paperless
trading
 Tie-up with National Securities Clearing Corporation Ltd for Clearing.
OPERATIONAL FEATURES OF BSE AND NSE:
The
leading stock exchanges in India have developed itself to a large extentsince its emergence.
These stock exchanges aim at offering the investors andtraders better
transparency, genuine
settlement cycle, honest transaction and toreduce and solve investor grievances if any. Please
Note: The researcher hasnot covered all the
operational features of both the stock exchanges, but
hastaken into consideration only the ones which are important to understand thethesis. The aim
to describe
these operational features is for betterunderstanding of the working of stock
exchanges. This is done for the purposeof easy understanding from the reader‘s point of
view.
Let us see and understand its general operational features.
1. Market Timings:
Trading on the equities segment takes place on all
days of the week (except
Saturdays and Sundays and holidays declared
by the Exchange in advance). The market timings of the equities
segment are:
Normal Market Open: 09:55 hours
Normal Market Close: 15:30 hours
The Post Closing Session is held between 15.50 to 16.00 hours.
2. Automated Trading System:
Today our country has an
advancedtrading system which is a fully automated screen based
trading system.This system adopts the principle of an order driven market as opposedto a quote
driven system.
i) NSE operates on the 'National Exchange for Automated Trading'
(NEAT) system.
ii) BSE operates on the „BSE‟s Online Trading‟ (BOLT)
system.
 Order Management in Automated Trading System:
The trading system provides complete flexibility to members in the kinds of orders that can be
placed
by them. Orders are first numbered and time-stamped on receipt and then immediately
processed for potential match.Every order has a distinctive order number and
a unique time
stamp on it. If a match is not found, then the orders are stored indifferent 'books'. Orders are
stored in price-time priority in variousbooks in the
following sequence:
Best Price, Within Price, by time priority.
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Price priority means that if two orders are entered into the system,the order having the best price
gets the higher
priority. Time priority means if two orders having the same price are entered, the
order that is entered first gets the higher priority.
 Order Matching Rules in
Automated trading system:
The best buy order is matched with the best sell order. An order may match partially with another
order resulting in multiple trades. For
order
matching, the best buy order is the one with the highest price and the best sell order is the one
with the lowest price. This is because the system views all buy
orders available from the point of
view of a seller and all sell orders from the point of view of the buyers in the market.So, of all
buy orders available in the market
at any point of time, a seller would obviously like to sell at the
highest possible buy price that is offered. Hence, the best buy order is the order with the highest
price
and the best sell order is the order with the lowest price.Members can proactively enter orders in
the system, which will be displayed in the system till the full
quantity is matched by one or more
of counter-orders and result into trade(s) or is cancelled by the member. Alternatively, members
may be reactive and put in
orders that match with existing orders in the system. Orders lying
unmatched
in the system are 'passive' orders and orders that come in to match the existing orders
are called
'active' orders. Orders are always matched at the passive order price. This ensures that the earlier
orders get priority over the orders that come in later.
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 Order Conditions in Automated Trading System:
A TradingMember can enter various types of orders depending
upon his/her requirements. These
conditions are broadly classified into three categories:
 Time Related Condition
 Price Related Condition
 Quantity Related
Condition
 Time Conditions
a) 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 is not
matched during the day, the order gets cancelled automatically
at the end of the trading day.
b) GTC Order –
Good Till Cancelled (GTC) order is an order that
remains in the system until it is
cancelled by the Trading Member. It will therefore be able to span trading days if it does
not get matched. The maximum number of
days a GTC order can remain in the system is
notified by the Exchange from time to time.
c) GTD –
A Good Till Days/Date (GTD) order allows the Trading
Member to specify the days/date
up to which the order should stay in the system. At the end of this period the order will
get flushed from the system. Each day/date
counted is a calendar day and inclusive of
holidays. The days/date counted are inclusive of the day/date on which the order is
placed. The maximum number of days
a GTD order can remain in the system is notified
by the Exchange from time to time.
d) IOC –
An Immediate or Cancel (IOC) order allows a Trading Member to
buy or sell a security
as soon as the order is released into the market, failing which the order will be removed
from the market. Partial match is possible for the
order, and the unmatched portion of the
order is cancelled immediately.
 Price Conditions
a) Limit Price/Order –
An order that allows the price to be specified
while entering the order into the system.
b) Market Price/Order –
An order to buy or sell securities at the best price obtainable at the time of entering the
order.
c)
Stop Loss (SL) Price/Order –
The one that allows the Trading Member to place an order which gets activated only
when the market price of the relevant security
reaches or crosses a threshold price. Until
then the order does not enter the market.A sell order in the Stop Loss book gets triggered
when the last traded price in the
normal market reaches or falls below the trigger price of
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the order. A buy order in the Stop Loss book gets triggered when the last traded price in
the normal market reaches
or exceeds the trigger price of the order.
E.g. If for stop loss buy order, the trigger is 93.00, the limit
price is 95.00 and the market (last traded) price is 90.00, then
this order is released into the
system once the market price reaches or exceeds 93.00. This order is added to the regular lot
book with time of triggering as the time
stamp, as a limit order of 95.00
 Quantity Conditions:
a) Disclosed Quantity (DQ)-
An order with a DQ condition allows the Trading Member to disclose only a
part of the
order quantity to the market. For example, an order of 1000 with a disclosed quantity
condition of 200 will mean that 200 is displayed to the market at a
time. After this is
traded, another 200 is automatically released and so on till the full order is executed. The
Exchange may set a minimum disclosed quantity criteria
from time to time.
b) MF- Minimum Fill (MF)
orders allow the Trading Member to specify the minimum quantity by which an order
should be filled. For example,
an order of 1000 units with minimum fill 200 will require
that each trade be for at least 200 units. In other words there will be a maximum of 5
trades of 200 each or
a single trade of 1000. The Exchange may lay down norms of MF
from time to time.
c) AON – All Or None (AON)
All or None orders allow a Trading Member to
impose the condition that only the full
order should be matched against. This may be by way of multiple trades. If the full order
is not matched it will stay in the
books till matched or cancelled.
Note: Currently, AON and MF orders are not available on the system as per SEBI directives.
3. Market Segments
The Exchange
operates the following sub-segments in the Equities segment:
 Rolling Settlement
In a rolling settlement, each trading day is considered as a trading period and
trades executed
during the day are settled based on the net obligations for the day.
At NSE, trades in rolling settlement are settled on a T+2 basis i.e. on the 2nd
working day. For
arriving at the settlement day all intervening holidays, which include bank holidays, NSE
holidays, Saturdays and Sundays are excluded. Typically
trades taking place on Monday are
settled on Wednesday, Tuesday's trades settled on Thursday and so on.
 Limited Physical Market
Pursuant to the directive of
SEBI to provide an exit route for small investors holding physical
shares in securities mandated for compulsory dematerialised settlement, the Exchange has
provided a facility for such trading in physical shares not exceeding 500 shares.This market
segment is referred to as 'Limited Physical Market' (small
window). The
Limited Physical Market was introduced on June 7, 1999.
Limited Physical Market - Salient Features
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with Book Type ‗OL‘ and series ‗TT‘.
applicable in the Limited Physical Market are same as those
applicable for
the corresponding Normal Market on that day.
-open
and post-close sessions are not allowed.
-for-trade basis and delivery obligations
arise out of each trade.
Orders
with the same price and quantity match on time priority i.e. orders which have come into
the system before will get matched first.
-till-cancelled (GTC)/Good-till-
date (GTD) orders placed and remaining as
outstanding orders in this segment at the close of market hours shall remain available for next
trading day. All orders in
this segment, including GTC/GTD orders, will be purged on the last
day of the settlement.
investor(s) before entering orders on their behalf on a trade date.
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4. Settlement Cycle
Settlement for trades is done on a trade-for-trade basis and delivery
obligations arise out of each
trade. The settlement cycle for this
segment is same as for the rolling settlement viz:
Salient features of settlement
purchased from the secondary market) is treated
as bad delivery. The shares standing in the name
of individuals/HUF only would constitute good delivery. The selling/delivering member must
necessarily be the
introducing member.
Any delivery of shares which bears the last transfer date on or after the introduction of the
security for trading in the LP market is construed as
bad delivery.
Any delivery in excess of 500 shares is marked as short and such deliveries are compulsorily
closed-out.
Shortages, if any, are compulsorily closed-out
at 20% over the actual traded price. Uncertified
bad delivery and re-bad delivery are compulsorily closed-out at 20% over the actual traded price.
All deliveries are
compulsorily required to be attested by the introducing/ delivering member.
The buyer must compulsorily send the securities for transfer and dematerialization,
latest within
3 months from the date of pay-out.
Company objections arising out of such trading and settlement in this market are reported in the
same manner as is
currently being done for normal market segment. However securities would
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be accepted as valid company objection,only if the securities are lodged for transfer
within 3 months from the date
of pay-out.
Company objections arising out of such trading and settlement in this market are reported in the
same manner as is currently being done for normal
market segment. However securities would
be accepted as valid company objection, only if the securities are lodged for transfer
within 3 months from the date of
pay-out.
5. Brokerage And Other Transaction Costs
Brokerage is negotiable. The Exchange has not prescribed any minimum brokerage. The
maximum brokerage is
subject to a ceiling of 2.5 percent of the contract value. However, the
average brokerage charged by the members
to the clients is much lower.Typically there are
different scales of brokerages for delivery
transaction, trading transaction, etc.
The Stamp Duty on transfer of securities in physical form is to be paid by the seller
but in
practice it is paid by the buyer while registering the shares in his name. In case of transfer of
shares, the rate is 50 paise for every Rs.100/- or
part thereof on
the basis of the amount of consideration and that for transfer of debentures the
rate of stamp duty varies from State to State, where the registered office of a
Company issuing
the debentures is located
6. Transfer Of Ownership
Transfer of ownership of securities, if the same is not delivered in demat form by the seller, is
effected through a date stamped transfer-deed which is signed by the buyer and seller. The duly
executed transfer-deed along with the share certificate has to be
lodged with the company for
change in the ownership.A nominal duty becomes payable in the form of stamps to be affixed on
the Transfer-deed remains valid for
twelve months or the next book closure
following the stamped date whichever occurs later for transfer of shares in the name of buyer.
However, for delivery of
shares in the market, transfer deed is valid till book closure date of the
company.
A.
B. The Role of the Stock Exchange in the Economy
Stock exchanges play a
vital role in the functioning of the economy by providing the backbone to
a modern nation's economic infrastructure. Stock exchanges help companies raise money
to
expand. They also provide individuals the ability to invest in companies. Stock exchanges
provide order and impose regulations for the trading of stocks. Finally,
stock exchanges and all
of the companies that are associated with the stock exchanges provide hundreds of thousands of
jobs.
 Business Expansion
Stock
exchanges provide companies the ability to raise capital to expand their businesses. When
a company needs to raise money they can sell shares of the company to
the public. They
accomplish this by listing their shares on a stock exchange. Investors are able to buy shares of
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public offerings and the money that is raised from the investors is used by the company to
expand operations, buy
another company or hire additional workers. All of this leads to increased
economic activity which helps drive the economy.
 Widespread Investing
Stock
exchanges allow any person to invest in the greatest companies in the world. Investors,
both large and small, use the stock exchanges to buy into a company's
future. Investing would
not be possible for the average person if there was not a centralized place to trade stocks. The
ability for the average person to invest in
these companies leads to increased wealth for the
investors. This increased wealth then leads to additional economic activity when the investors
spend their money.
 Direct Jobs
The stock exchanges and all of the companies that serve the stock exchanges such a brokerage
firms, investment banks and financial news
organizations employ hundreds of thousands of
people. Most of the jobs related to stock exchanges are well paying and career orientated jobs. As
a result, the
employees of these firms are able to help spur economic activity.
 Warning
If the stock exchanges do not fully carry out their duty of overseeing the stock trading
process
the investing public will lose faith in the fairness and safety of the stock market. If this happens
then all of the economic activity that the stock exchanges
create will decrease and this will lead
to an overall drop in economic activity. The stock exchanges must be sure that investors are not
taken advantage of and that
investors continue to have confidence in the system the stock
exchanges created.
 Profit sharing
They help both casual and professional stock investors, to get
their share in the wealth of
profitable businesses.
 Corporate governance
Stock exchanges impose stringent rules to get listed in them. So listed public companies
have
better management records than privately held companies.
 Creating investment opportunities for small investors
Small investors can also participate in the
growth of large companies, by buying a small number
of shares.
 Government capital raising for development projects
They help government to rise fund for
developmental activities through the issue of bonds. An
investor who buys them will be lending money to the government, which is more secure, and
sometimes
enjoys tax benefits also.
 Barometer of the economy
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They maintain the stock indexes which are the indicators of the general trend in the
economy.They also regulate the
stock price fluctuations.
 Mobilizing savings for investment
They help public to mobilize their savings to invest in high yielding economic sectors, which
results
in higher yield, both to the individual and to the national economy.
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CHAPTER 4
TRADING
OF
STOCKS
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MERITS OF OWNING STOCKS
 Earn dividends.
Dividends are nothing but a part of company’s profits
distributed to its share holders. The
company’s management may declare dividends either in between a financial year (called interim
dividends) or at the end of the
financial year (called final dividends).However, it is not
mandatory for the companies to pay dividends. It can use the profits for alternative uses like
expansion. The
decision to pay or not to pay dividends is taken at the annual meeting by the
majority voting of the shareholders. Blue-chip companies (large companies) generally
are
consistent dividend payers.
 Capital appreciation.
As the company expands and grows, it acquires more assets and makes more profit. As a result,
the value of
its business increases. This, in turn, drives up the value of the stock. So when you
sell, you will receive a premium over what you paid. This is known as capital gain
and this is the
main reason why people invest in stocks. They aim capital appreciation.
 Receive bonus shares
For the time being, let us understand that bonus
shares are – Free shares are given to you .Later
on we will discuss about bonus shares in detail.
 Rights issue
A company may require more funds to expand it’s
business and for that, it may need more funds.
I such cases, the company can issue further shares to the public. However, before approaching
the public, the existing
shareholders will be given a chance to subscribe to more shares if they
want. That’s called a rights issue. This is done in order to ensure that the existing
shareholders
maintain the same degree of control in the company. Thus you can maintain the participation in
the company profits.
 Stocks can be pledged
Stocks
are considered as assets and hence, banks accept shares as security for raising loans.
Should there be an an emergency, shares can quickly pledged to raise funds.
Apart from that,
Brokerage firms allow you to borrow money from their account based on the current share
holding you have in your demat account maintained
with them. If you want to utilize a sudden
surprise opportunity in markets, but if you don’t have the cash right now, you can adopt this
route.
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 High liquidity
Stocks are highly liquid. It can be converted into cash in no time. With online trading, all it takes
is
the click of button to sell you holdings. You can receive your cash in two days.
 Capital appreciation or dividends?
The above mentioned income sources may not
be present in every company you buy. For
example- if you’re buying company that has a huge potential to grow, it may not pay it’s surplus
as dividends. Instead, it
will be used for further growth. In such cases, huge capital appreciation
may happen. So depending upon your investment strategy, you’ll have to choose what you
want.
It’s always wise to go for capital appreciation rather than dividends.
DEMERITS OF OWNING STOCKS
 Since common stock represents ownership of a
business, stockholders are the last to get
paid, like all other owners. A company must first pay its employees, suppliers, creditors,
maintain its facilities and pay its
taxes. Any money left can then be distributed among its
owners.
 While shareholders are company owners, they do not enjoy all of the rights and privileges
that
the owners of privately held companies do. For example, they cannot normally walk
in and demand to review in detail the company’s books.
 Investors in a
company may not know all that there is to know about the company. This
limited information can sometimes cause investment decision-making to be difficult.

Stock prices tend to be volatile. Prices can be erratic, rising and declining quickly. Such
declines often cause investors to panic and sell, which actually only serves
to lock in their
losses.
 Stock values can sometimes change for no apparent reason, which can be quite frustrating
for the investor who is trying to anticipate the
stock’s behavior based on the actual
performance of the company.
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WHAT IS TRADING OF STOCKS?
Most stocks are traded on exchanges, which are places where buyers and
sellers meet and decide
on a price. Some exchanges are physical locations where transactions are carried out on a trading
floor. You've probably seen pictures of a
trading floor, in which traders are wildly throwing their
arms up, waving, yelling, and signaling to each other. The other type of exchange is virtual,
composed of a
network of computers where trades are made electronically.
The purpose of a stock market is to facilitate the exchange of securities between buyers and
sellers,
reducing the risks of investing. Just imagine how difficult it would be to sell shares if you
had to call around the neighborhood trying to find a buyer. Really, a stock
market is nothing
more than a super-sophisticated farmers' market linking buyers and sellers.
WHO IS A STOCKBROKER?
Definition of 'Stockbroker'
1. An agent
that charges a fee or commission for executing buy and sell orders submitted by an
investor.
2. The firm that acts as an agent for a customer, charging the customer a
commission for its
services.
A stockbroker is an individual / organization who are specially given license to participate in the
securities market on behalf of clients.
The stockbroker has the role of an agent. When the
Stockbroker acts as agent for the buyers and sellers of securities, a commission is charged for
this service.
As an
agent the stock broker is merely performing a service for the investor. This means that the
broker will buy for the buyer and sell for the seller, each time making
sure that the best price is
obtained for the client.
An investor should regard the stockbroker as one who provides valuable service and information
to assist in making
the correct investment decision. They are adequately qualified to provide
answers to a number of questions that the investor might need answers to and to assist in
participating in the regional market. Here are some questions which arise in the minds of the
investors before the take help of the brokers for investing their money
in a particular company.
 Are they governed by any Rules and Regulations?
Of course, yes. Stock brokers are governed by SEBI Act, 1992, Securities Contracts
(Regulation)
Act, 1956, Securities and Exchange Board of India [SEBI (Stock brokers and Sub brokers) Rules
and Regulations, 1992], Rules, Regulations and Bye
laws of stock exchange of which he is a
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member as well as various directives of SEBI and stock exchange issued from time to
time. Every stock broker is
required to be a member of a stock exchange as well as registered
with SEBI. Examine the SEBI registration number and other relevant details can be found out
from the registration certificate issued by SEBI.
 How do I know whether a broker is registered or not?
Every broker displays registration details on their website
and on all the official documents. You
can confirm the registration details on SEBI website. The SEBI website provides the details of
all registered brokers. A
broker’s registration number begins with the letters “INB” and that of a
sub broker with the letters “INS”.
 What are the documents to be signed with stock
broker?
Before start of trading with a stock broker, you are required to furnish your details such as name,
address, proof of address, etc. and execute a broker client
agreement. You are also entitled to a
document called ‘Risk Disclosure Document’, which would give you a fair idea about the risks
associated with securities
market. You need to go through all these documents carefully.
 SUB BROKERS
According to the BSE website – “Sub-broker” means any person not being a
member of a Stock
Exchange who acts on behalf of a member-broker as an agent or otherwise for assisting the
investors in buying, selling or dealing in securities
through such member-brokers.
All Sub-brokers are required to obtain a Certificate of Registration from SEBI without which
they are not permitted to deal in
securities. SEBI has directed that no broker shall deal with a
person who is acting as a sub-broker unless he is registered with SEBI and it shall be the
responsibility
of the member-broker to ensure that his clients are not acting in the capacity of a
sub-broker unless they are registered with SEBI as a sub-broker.
It is mandatory
for member-brokers to enter into an agreement with all the sub-brokers. The
agreement lays down the rights and responsibilities of member-brokers as well as sub-
brokers.
STOCK BROKERS IN INDIA.
There are a number of broking houses all over India. Many of them have International presence
too. Following are some of
the leading Stock Broking firms in India.
 IndiaInfoline
 ICICIdirect
 Share khan
 India bulls
 Geojit Securities
 HDFC
 Reliance Money
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 Religare
 Angel Broking
Investors have to check the broker’s terms and conditions and decide about opening a
trading
account. Only Govt. tax rates like, security transaction tax, stamp duty and service tax are
uniform other charges like brokerage for delivery trades, intraday
trades, minimum transaction
charge, statement charges, DP charges, annual maintenance charges etc., may vary from one
broker to another.
ROLE OF
STOCKBROKER IN ASTOCKMARKET
When you plan to start investing in a stock market, the first thing you have to do is to choose a
stock broker. It is just like
choosing a car you think is most suitable for you. You can thoroughly
research the whole market in order to find the best car for you but require a medium or a
venue
to execute the actual transaction. The same strategy is needed when you want to buy stock in a
stock market. You can select a company to invest in by
conducting detailed research about its
future prospects but you still need to have a broker to make the final transaction and
purchase its stock from the stock market.
A stock broker acts as the agent of an investor and represents his clients to buy or sell
stocks, derivatives and other securities.
The term stock broker applies to
companies that deal in securities as well as to its employees
who are technically working for the brokerage and are its registered representatives. Most stock
brokers
work far away from stock trading floors. The primary role of a stock broker is to execute
transactions on behalf of his clients by buying and selling securities in the
stock market.
As a representative of his clients, a stock broker seeks the best deals to buy and sell stock.
They usually deal in all types of securities and also handle
derivatives, such as commodity
futures. They also advise their clients about when to make transactions and guide them about
what to look for in market dealings.
However, they are not licensed investment advisor and
therefore, you should always consult Your Personal Financial Mentor before making any
financial
investment decision in a stock market. After completion of the transaction, they forward
related information to their clients and make transfer arrangements of stock
certificates or other
paperwork.
Stock brokerage firms and individual stock brokers are regulated by the Securities and Exchange
Commission and other specific
markets. An individual broker must pass a test administered by
concerned regulatory authorities and must complete his registration through brokerage firms,
which
in some cases require registration with a concerned securities commission.
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A PHOTO OF STOCK BROKERS PERFORMING THE ONLINE TRADING
Stock brokers are paid commissions
which usually consist of a percentage of a value of the
trade transaction in a stock market.
Brokerage firms are also known as discount brokers as they offer trade
transactions at a single
price. They provide recommendations only on those investments that meet financial goals and
needs of a client. A stock broker provides
advisory services for investing in a stock market and in
return, an investor pays a fixed fee to them. They also offer special features, such as check
writing, interest-
bearing accounts, credit cards and direct deposits and hence, play a role of
providing these limited banking services. Margin interest payments are charged to
investors for
borrowing against the brokerage account for investment in a stock market. They also take service
charges from their clients for performing
administrative tasks, such as for handling Individual
Retirement Account (IRA) and for mailing stocks in the form of certificates. They can also
purchase options,
exchange traded funds (ETFs), bonds, shares, mutual funds, and other
investments on your behalf.
58. 58.
58
METHOD OF TRADING IN STOCK EXCHANGES
AND
THE TYPES OF BROKERS
A stock exchange is a
corporation or organization that provides trading facilities for stockbrokers
and traders. Instruments traded on stock exchanges include stocks, investment trusts,
commodities, options, mutual funds, unit trusts and bonds. Only members can trade on an
exchange.
 Specialists
A member of an exchange who acts as the market
maker to facilitate the trading of a given stock.
The specialist holds an inventory of the stock, posts the bid and ask prices, manages limit orders
and executes trades.
Specialists are also responsible for managing large movements by trading
out of their own inventory. If there is a large shift in demand on the buy or sell side, the
specialist
will step in and sell out of their inventory to meet the demand until the gap has been narrowed.
Before we address this question, let's review what
specialists do. Specialists are people on the
trading floor of an exchange, such as the NYSE, who hold inventories of particular stocks. A
specialist's job is not only
to match buyers and sellers, but also to keep an inventory for him or
herself that can be used to shift the market during a period of illiquidity.
The job of the
specialist originated in 1872, when it was recognized that there was a need for a
new system of continuous trading - before this, each stock had a set time during
which it could
be traded. Under the new system,brokers began to deal in a specific stock to remain at one
location on the floor of the exchange. Eventually, the role
of these brokers evolved into that of
the 'specialist'.
It is the specialist's job to act in a way that benefits the public above all. Every specialist
accomplishes this by
filling the four vital roles of
 auctioneer,
 catalyst,
 agent and
 principal.
Let's take a closer look at what a specialist does in fulfilling each of these roles:

Auctioneer – Shows best bids and offers, becoming a 'market maker'.
 Catalyst – Keeps track of the interests of different buyers and sellers and continually
updates them.
 Agent – Places electronically routed orders on behalf of clients. Floor brokers can leave
an order with a specialist, freeing themselves up to take on
other orders. Specialists then
take on the responsibilities of a broker.
 Principal – Acts as the major party to a transaction. Since specialists are responsible for
keeping the market in equilibrium, they are required to execute all customer orders ahead
of their own.
59. 59.
59
A stock specialist is a member of a stock exchange who provides several services. They make a
market in stocks by
providing the best bid and best ask during trading hours. Specialists also
maintain a fair and orderly market.
 Floor Brokers
An independent member of an
exchange who is authorized to execute trades on the exchange
floor on behalf of clients. A floor broker is a middleman who acts as an agent for clients,
indirectly
giving them the best access possible to the exchange floor. A floor broker’s clients
typically include institutions and wealthy people such as financial-service firms,
pension funds,
mutual funds, high net worth individuals and traders. A floor broker’s primary responsibility is
“best execution” of client orders, and to achieve this
objective, he or she must continuously
assess myriad factors including market information, market conditions, prices and orders.
Also known as “pit broker.”
A
floor broker is different from a floor trader, who trades as principal for his or her own account,
whereas the floor broker acts as an agent for clients. A floor broker
also differs from a
commission broker in that the latter is an employee of a member firm, while the floor broker is
an independent member of the exchange.
Floor
brokers trade on the floor on the major exchanges. Floor brokers buy and sell securities in
their own account. Floor brokers are required to take and pass written
tests in order to trade.
They must abide by exchange rules, and they must be a member of the exchange on which they
trade.
 A floor broker executes orders for
their clients. They do not execute on their own
accounts.
To put it simply, a floor broker is someone who represents client orders at the point of sale on the
NYSE
(New York Stock Exchange) floor, our source explained.
60. 60.
60
Almost all NYSE floor brokers trade on an "agency" basis, meaning they don't trade for
themselves or their firm
like market-makers do.
 A floor broker provides information for their clients.
A floor broker's clients can include banks, broker-dealers, hedge funds, mutual
funds, pension
funds, day traders and even some high net-worth individuals.
"We are the 'eyes and ears' to our clients' stocks. We give them market color, let them
know of
market rumors and find liquidity from the other hundred or so floor brokerage shops," our source
told us.
 They earn a living from commission on each
share traded.
A floor broker earns commission for each share traded.
This can be anywhere from half a penny per share or five cents a share, the floor broker
explained.
 A floor broker's workday begins a few hours before the opening bell.
The stock market opens at 9:30 a.m. and the closing bells rings at 4:00 p.m., but
a NYSE floor
broker begins his or her day much earlier than that.
A floor broker might get in around 7:30 a.m. or 8:00 a.m, our source said.
At this time, a floor
broker will typically read newspapers, go over the news-wires, check their
Bloomberg terminal and perhaps emails stories/links to their customers.
 Then the
orders and 'look' requests start coming in.
At about 9:00 a.m. a floor broker starts getting orders and "look" requests.
When someone asks for a "look" near the open
or close of the market, it means finding out a
price for the open/close and/or what the buy/sell imbalance is.
If someone asks for a "look" in the middle of the day,
that means finding out some color on the
stock such as who's been buying, who's been selling, any rumors or news that's out.
A floor broker would ask a specialist
to find this information out.
 Right around the opening bell it's 'complete mayhem.'
The market opens at 9:30 a.m.
From 9:15 a.m. to 9:45 a.m. it's "complete
mayhem" like it has been for years.
 Then things start to settle down and the computers and algos do most of the trading.
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