Professor Vipin 2015
Stock Market
History of Stock Exchanges in India
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 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.
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 a centralized
exchange-based internet trading system, BSEWEBx.co.in to enable investors anywhere in the world
to trade on the BSE platform.
The launch of SENSEX in 1986 was later followed up in January 1989 by introduction of BSE National
Index (Base: 1983-84 = 100). It comprised 100 stocks listed at five major stock exchanges in India Mumbai, Calcutta, Delhi, Ahmedabad and Madras. The BSE National Index was renamed BSE-100
Index from 14 October 1996 and, since then, its calculations take into consideration only the prices
of stocks listed at BSE.
BSE launched the dollar-linked version of BSE-100 index on 22 May 2006, the "BSE-200" and the
"DOLLEX-200" on 27 May 1994, the BSE-500 Index and 5 sectoral indices in 1999, and the BSE-PSU
Index, DOLLEX-300, and the BSE TECk Index (the country's first free-float based index) in 2001. Over
the years, BSE shifted all its indices to the free-float methodology (except BSE-PSU index).
BSE disseminates information on the Price-Earnings Ratio, the Price to Book Value Ratio, and the
Dividend Yield Percentage of all its major indices on day-to-day basis. The values of all BSE indices
are updated on a real time basis during market hours and displayed through the BOLT system, the
BSE website, and news wire agencies. All BSE Indices are reviewed periodically by the BSE Index
Committee. This Committee, which comprises eminent independent finance professionals, frames
the broad policy guidelines for the development and maintenance of all BSE indices. The BSE Index
Cell carries out the day-to-day maintenance of all indices and conducts research on development of
new indices.
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SENSEX is significantly correlated with the stock indices of other emerging markets.
Membership
The trading platform of a stock exchange is accessible only to trading members. They play a
significant role in the secondary market by bringing together the buyers and the sellers.
The brokers give buy/sell orders either on their own account or on behalf of clients. As these buy
and sell order matches, the trades are executed. The exchange can admit a broker as its member
only on the basis of the terms specified in the Securities Contracts (Regulation) Act, 1956, the SEBI
Act 1992, the rules, circulars, notifications, guidelines, and the byelaws, rules and regulations of the
concerned exchange. No stock broker or sub- broker is allowed to buy, sell or deal in securities,
unless he or she holds a certificate of registration from the SEBI.
Organization of Stock exchanges
The stock exchanges are the exclusive centres for trading of securities. At present, there are 23
operative stock exchanges in India. Most of the stock exchanges in the country are incorporated as
‘Association of Persons’ of Section 25 companies under the Companies Act. These are organised as
‘mutuals’ and are considered beneficial in terms of tax benefits and matters of compliance.
The trading members, who provide brooking services also own, control and manage the stock
exchanges. They elect their representatives to regulate the functioning of the exchange, including
their own activities. Until recently, the area of operation/jurisdiction of an exchange was specified at
the time of its recognition, which in effect precluded competition among the exchanges.
These are called regional exchanges. In order to provide an opportunity to investors to invest/trade
in the securities of local companies, it is mandatory for the companies, wishing to list their securities,
to list on the regional stock exchange nearest to their registered office.
If they so wish, they can seek listing on other exchanges as well. Monopoly of the exchanges within
their allocated area, regional aspirations of the people arid mandatory listing on the regional stock
exchange resulted in multiplicity of exchanges.
As a result, at the end of March 2008, there were 19 stock exchanges registered with SEBI having a
total of 8,517 registered brokers and 43,874 registered sub-brokers trading on them.
The stock exchanges need to be recognized under the Securities Contracts (Regulation) Act, 1956.
There are 19 stock exchanges in India. The Securities and Exchange Board of India (SEBI), has
approved and notified the Corporatisation and Demutualisation Scheme of 19 Stock Exchanges. BSE
has successfully completed the process of Demutualisation in terms of The BSE (Corporatisation and
Demutualisation) Scheme, 2005 on May 16, 2007.
NSE since inception has adopted a demutualised structure and its model of demutualization
compares well with the international models of demutualised stock exchanges as seen from.
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Functions of a Stock Exchange
1. Economic Barometer: A stock exchange is a reliable barometer to measure the economic
condition of a country. Every major change in country and economy is reflected in the prices of
shares. The rise or fall in the share prices indicates the boom or recession cycle of the economy.
Stock exchange is also known as a pulse of economy or economic mirror which reflects the economic
conditions of a country.
2. Pricing of Securities: The stock market helps to value the securities on the basis of demand and
supply factors. The securities of profitable and growth oriented companies are valued higher as
there is more demand for such securities. The valuation of securities is useful for investors,
government and creditors. The investors can know the value of their investment, the creditors can
value the creditworthiness and government can impose taxes on value of securities.
3. Safety of Transactions: In stock market only the listed securities are traded and stock exchange
authorities include the companies names in the trade list only after verifying the soundness of
company. The companies which are listed they also have to operate within the strict rules and
regulations. This ensures safety of dealing through stock exchange.
4. Contributes to Economic Growth: In stock exchange securities of various companies are bought
and sold. This process of disinvestment and reinvestment helps to invest in most productive
investment proposal and this leads to capital formation and economic growth.
5. Spreading of Equity Cult: Stock exchange encourages people to invest in ownership securities by
regulating new issues, better trading practices and by educating public about investment.
6. Providing Scope for Speculation: To ensure liquidity and demand of supply of securities the stock
exchange permits healthy speculation of securities.
7. Liquidity: The main function of stock market is to provide ready market for sale and purchase of
securities. The presence of stock exchange market gives assurance to investors that their investment
can be converted into cash whenever they want. The investors can invest in long term investment
projects without any hesitation, as because of stock exchange they can convert long term
investment into short term and medium term.
8. Better Allocation of Capital: The shares of profit making companies are quoted at higher prices
and are actively traded so such companies can easily raise fresh capital from stock market. The
general public hesitates to invest in securities of loss making companies. So stock exchange
facilitates allocation of investor’s fund to profitable channels.
9. Promotes the Habits of Savings and Investment: The stock market offers attractive opportunities
of investment in various securities. These attractive opportunities encourage people to save more
and invest in securities of corporate sector rather than investing in unproductive assets such as gold,
silver, etc.
Online Trading in India
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The act of placing buy/sell orders for financial securities and/or currencies with the use of a
brokerage's internet-based proprietary trading platforms. The use of online trading increased
dramatically in the mid- to late-'90s with the introduction of affordable high-speed computers and
internet connections. Stocks, bonds, options, futures and currencies can all be traded online.
The best five buy and sell orders for every contract available for trading are visible to the market and
orders are matched based on price time priority logic. Orders can be placed with time conditions
and/ or price conditions
Time related Conditions
a) DAY order- A Day order 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 - A Good Till Cancelled (GTC) order is an order that remains in the system until the
expiry of the respective contract in which it is entered or until when the same is cancelled by
the member.
c) GTD - A Good Till Date (GTD) order is valid till the date specified by the member. After the
specified date the unexecuted orders get automatically cancelled by the system.
d) IOC - An Immediate or Cancel (IOC) order allows a member to execute the orders as soon as
the same is placed in the market, failing which the order will get cancelled immediately
Price Conditions
a) Limit Order – The order wherein the price is to be specified while placing the same.
b) Market Order – The order at the best available price at the time of placing the same.
Role of SEBI
The SEBI performs functions to meet its objectives. To meet three objectives SEBI has three
important functions. These are:
1. Protective Functions: These functions are performed by SEBI to protect the interest of investor
and provide safety of investment. As protective functions SEBI performs following functions:
I.
II.
It Checks Price Rigging: Price rigging refers to manipulating the prices of securities with the
main objective of inflating or depressing the market price of securities. SEBI prohibits such
practice because this can defraud and cheat the investors.
It Prohibits Insider trading: Insider is any person connected with the company such as
directors, promoters etc. These insiders have sensitive information which affects the prices
of the securities. This information is not available to people at large but the insiders get this
privileged information by working inside the company and if they use this information to
make profit, then it is known as insider trading, e.g., the directors of a company may know
that company will issue Bonus shares to its shareholders at the end of year and they
purchase shares from market to make profit with bonus issue. This is known as insider
trading. SEBI keeps a strict check when insiders are buying securities of the company and
takes strict action on insider trading.
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III.
IV.
V.
SEBI prohibits fraudulent and Unfair Trade Practices: SEBI does not allow the companies to
make misleading statements which are likely to induce the sale or purchase of securities by
any other person.
SEBI undertakes steps to educate investors so that they are able to evaluate the securities of
various companies and select the most profitable securities.
SEBI promotes fair practices and code of conduct in security market by taking following
steps:
a) SEBI has issued guidelines to protect the interest of debenture-holders wherein
companies cannot change terms in midterm.
b) SEBI is empowered to investigate cases of insider trading and has provisions for stiff
fine and imprisonment.
c) SEBI has stopped the practice of making preferential allotment of shares unrelated
to market prices.
2. Developmental Functions: These functions are performed by the SEBI to promote and develop
activities in stock exchange and increase the business in stock exchange. Under developmental
categories following functions are performed by SEBI:
I.
II.
SEBI promotes training of intermediaries of the securities market.
SEBI tries to promote activities of stock exchange by adopting flexible and adoptable
approach in following way:
a) SEBI has permitted internet trading through registered stock brokers.
b) SEBI has made underwriting optional to reduce the cost of issue.
c) Even initial public offer of primary market is permitted through stock exchange.
3. Regulatory Functions: These functions are performed by SEBI to regulate the business in stock
exchange. To regulate the activities of stock exchange following functions are performed:
I.
II.
III.
IV.
V.
VI.
SEBI has framed rules and regulations and a code of conduct to regulate the intermediaries
such as merchant bankers, brokers, underwriters, etc.
These intermediaries have been brought under the regulatory purview and private
placement has been made more restrictive.
SEBI registers and regulates the working of stock brokers, sub-brokers, share transfer agents,
trustees, merchant bankers and all those who are associated with stock exchange in any
manner.
SEBI registers and regulates the working of mutual funds etc.
SEBI regulates takeover of the companies.
SEBI conducts inquiries and audit of stock exchanges.
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BSE and NSE
Bombay Stock Exchange (BSE) is an Indian stock exchange located in Mumbai, Maharashtra, India.
Established in 1875 and is considered to be one of Asia’s fastest stock exchanges, with a speed of
200 microseconds and one of India’s leading exchange groups and the oldest stock exchange in the
South Asia region. Bombay Stock Exchange is the world's 10th largest stock market by market
capitalization at $1.7 trillion as of 23 January 2015. More than 5,000 companies are listed on BSE.
NSE was established in 1992 as the first demutualized electronic exchange in the country. NSE was
the first exchange in the country to provide a modern, fully automated screen-based electronic
trading system which offered easy trading facility to the investors spread across the length and
breadth of the country.
NSE has a market capitalization of more than US$1.65 trillion, making it the world’s 12th-largest
stock exchange as of 23 January 2015.[1] NSE's flagship index, the CNX Nifty, the 50 stock index, is
used extensively by investors in India and around the world as a barometer of the Indian capital
markets.
Derivatives
The derivatives market is the financial market for derivatives, financial instruments like futures
contracts or options, which are derived from other forms of assets.
The market can be divided into two, that for exchange-traded derivatives and that for over-thecounter derivatives. The legal nature of these products is very different, as well as the way they are
traded, though many market participants are active in both.
Derivatives markets take many different forms, some of which are traded in the usual manner (i.e.
the same as their underlying market), but some of which are traded quite differently (i.e. not the
same as their underlying market). The following are the most often traded types of derivatives
markets:
(i)
(ii)
(iii)
(iv)
(v)
Futures Markets
Options Markets
Warrants Markets
Contract For Difference (CFD) Markets
Spread Betting
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