12.1   Introduction
12.2   Stock Exchange - Meaning
12.3   Functions of Stock Exchange
12.4   Bombay Stock Exchange (BSE)
12.5   National Stock Exchange of India (?~TSEII
12.6   Trading Procedure
12.7   Securities Exchange Board of India (SEBI)

In the earlier chapters we have very well discussed about the sources of capital, meaning of owned and borrowed capital and just about the ways of raising capital.
Is there any special market where securities (i.e. shares and debentures) are bought and sold? Let us go into details about this special market - `Stock Exchange'.
The word `Stock' or stock market has become a key word and matter of interest to every one. The scenario of investments into stocks or securities was a preserve for a class of people who are rich with huge surplus and can afford risks - but now it is characterized by masses. It has become a magnetic attraction for a most common man for investing his little surplus into security market. This is of course possible due to information transmitting by electronic media and increasing awareness of investment opportunities along with a wonderful product option like SIP -Systematic Investment Plan - which is designed for a common man who, could conveniently go for an option of a SIP for Rs. 1000 p.m.
Now with the help of SIP you can land into securities market.

Unit objectives :
This unit will help students to understand
·                     The importance of stock or capital market
·                     The way of investment - procedure of entering into stock market
·                     The role of SEBI
·                     Different terms used in stock exchange

Meaning : Stock exchange is a specific place ,where trading of the securities, is arranged in an organized method. In simple words, it is a place where shares, debentures and bonds (securities) are purchased and sold. The term securities include equity shares, preference shares, debentures, government bonds, etc. including mutual funds.
The important features of a stock exchange are as follows
·                     Stock exchange is a place where buyers and sellers meet and decide on a price.
·                     Stock exchange is a place where stocks or all types of securities are traded.
·                     Stock exchange is at physical location, where transactions are carried out on a trading floor.
·                     The purpose of a stock exchange or market is to facilitate the exchange of securities between buyers and sellers, thus reducing the risk.
A stock exchange provides a platform or mechanism to, the investors - individuals or institutions to purchase or sell the securities of the companies, Government or semi Government institutions. It is like a commodity market where securities are bought and sold. It is an important constituent of capital market.
The stock exchange is also termed as 'Stock Market', 'Share Market' or `Share Bazaar'.
Stock exchange or securities market is like a commodity market where securities are bought and sold.
The security market is divided as follows.
Security Market
             Primary Market                                            Secondary Market
¯       ¯
            Issuing Company                                            Stock Exchange
          Directly to Investors                                - Trading of Listed Securities
                   i.e. IPO                                     - Second hand or Existing securities

Let us understand one by one both the markets
·        Primary Market : As the diagram suggests here in primary market, new securities for the first and final time are floated by issuing companies themselves. Direct contact with the investors at large is established by the companies for selling of the securities in response to the direct appeal made by companies (through electronic media, print media) to investors.
·        Secondary Market : As the diagram suggests a stock exchange is the single most important institution in the secondary market for the securities. It is the place where already issued and . outstanding shares are bought and sold repeatedly. This is a specific place where trading of second hand or existing securities is arranged in an organized manner.
          Here investors can buy and sell securities from - to other investors. The securities in the stock exchange are traded, cleared and settled through intermediaries as per prescribed regulatory framework.
          The company needs to be listed on the stock exchange for the purpose of trading through stock exchange.
·        Definition of stock exchange : According to the Securities Contracts (Regulation) Act 1956, the term 'stock exchange' is defined as ''An association, organization or body of individuals, whether incorporated or not, established for the purpose of assisting, regulating and controlling of business in buying, selling and dealing in securities."        
·        Husband and Dockerary have defined stock exchange as : "Stock exchanges are privately organized market which are used to facilitate trading in securities."
·        Management of stock exchange : An executive committee is constituted at each exchange to look after their management. The composition, powers and the name of the executive committee differ from exchange to exchange. The executive committee is known as 'Governing body' in Mumbai, Committee of management in Kolkatta and council of management in most of other stock exchanges.
          The constitution of committee is similar to the one found in other limited companies. There are other supporting committees to assist the executive committee like Advisory committee, Listing committee, Default committee, etc.
          Executive committee of stock exchange looks after the overall activities and management of stock exchange. Usually the period of the committee is one year and members retire by rotation.
·         Organization:
          In India, the stock exchange may be organized in one of the following three forms.
          ·        Voluntary Non profit making organization
     ·        Companies with liability limited by shares
     ·        Companies limited by guarantee.
          The Securities Control (Regulations) Act 1956, provides rules for their functioning, licensing, recognition and for controlling speculations.
·        Membership of stock exchange :
The membership of a stock exchange is given only to the individual persons of good moral character, competent, experienced and financially sound A company or an institution cannot become a member of the stock exchange.
          Eligibility criteria includes
          1.       Citizen of India
          2.       Not less than 20 years
          3.       Should not be bankrupt / insolvent / convicted of any fraud.
          4.       Should not be director, partner or employee of the company dealing with securities.
          Fees for membership
Rs. 5000 - As entrance fees
Rs. 20,000 - As securities Deposit
After making detailed enquiry of a person he is granted membership and a membership card is issued.
·        Role of stock exchange in the capital market :
While we study the role of stock exchange in the capital market, let us see what is mean by capital market.
Capital Market
Capital market is the broad term which includes Primary market, secondary market, lending institutions, bank, investors and just about anybody and everybody who is engaged in providing long term capital (equity or debt) to the industrial sector. In this market medium term and long term capital is supplied and demanded.
In Indian economy the dynamic growth of the capital market has been particularly marked during the period following the liberalization of economic policy in the industrial, financial and foreign trade sector in 1991. Though there have been shocking setbacks in certain years, the volume has no leaps and bounds.

Role of stock exchange in capital market
·                     Encourages capital formation : A common investor is attracted to capital market. Today investor is preferring to divert his surplus and savings in the securities like shares, debentures, mutual funds etc. As a result new capital formation is speeded up.
·                     Resource Mobilsation : Due to continuous buying and selling of the securities the resources of the economy flow from one company to other company giving comparatively higher returns. This helps mobilisation of resources.
·                     Help in repaid economic development : The stock exchanges help in the process of rapid economic development by speeding up the process of capital formation and resource mobilization. It helps in raising the medium and long term capital for the development and expansion of the companies. New industries and commercial enterprises easily get capital funds through a stock exchange.                                                                                        
·                     Flexibility in investments : The stock exchanges provide liquidity to the investment made in the securities. As there are multiple options, investors can flexibly go on switching their investment where it is more beneficial.
·                     Value addition to the securities : Listing of shares on a stock exchange adds to the prestige and reputation to companies. With the advantage of listed shares it can raise loans from corporate sector.

Presence and vibrant functioning of a stock exchange is necessary for a developing economy. It reflects healthy financial and investment conducive atmosphere in the economy.
          The Indian securities market is considered as one of the most promising emerging markets. It is one of the top eight markets of the world. The stock exchange plays a vital role in the process of raising resources for the development of corporate sector. In the absence of the stock exchange it would be impossible for private enterprises, industries and entrepreneurs to survive and grow. A stock exchange performs various important functions as discussed below.
·                     Liquidity : It is the stock exchange that provides liquidity to private investment in corporate enterprises. It provides marketability along with liquidity to the product called securities. In other words, the facility of stock exchange provides a two-way outlet as it transforms money into investment and vice versa,'without much delay.
·                     Promotes capital formation : A stock exchange motivates the investors to invest their savings in the securities of the reputed companies. Stock exchange is the market where buying and selling of securities continually goes on. As a result, capital flows continually into business -field. Thus, formation of capital goes on.,
·                     Fair evaluation of securities : A .stock exchange like any other market provides a mechanism for evaluating the prices of securities through the basic law of demand and supply.
Stock exchange prices help to check the real worth of the securities in the market. The prices quoted on stock exchange are provided with wide, publicity through' electronic as well as print media. The working of stock exchanges is on line which help investors keep in touch with price update and know real worth of their investment.
·                     Protects investors interest : All the transactions in the stock exchanges are effected and controlled by the Securities Control (Regulation) Act 1956. The stock exchanges protect the interests of the investors through the strict enforcement of their rules and regulations.
The malpractices of the brokers are punishable with heavy fine, suspension of their membership and. even imprisonment. .
·                     Economic Barometer : A stock exchange serves as a reliable barometer of a country's economic status. Stock exchanges support and promote industrial development. It stimulates investment in productive sector which accelerates the process of economic development of the country.
·                     Motivation to Management : A stock exchange allows the trading of listed securities only. Listing procedure requires to comply with certain guidelines for protecting the interests of investors and obviously are under strict supervision of stock exchange. If companies do not comply with the rules and regulations of the exchange, the shares of a company can be delisted. To avoid such unfavorable and undesirable consequences every company manages its affairs more cautiously and effectively.
·                     Best utilization of capital : The stock exchange regulates and controls the flow of investment from unproductive to productive, uneconomic to economic, unprofitable to profitable enterprises. Thus, savings of the people are channalised into industry yielding good returns and underutilization of, capital is avoided.. As the stock exchange provides an account of price variations of the securities listed on it (upward or downward fluctuations) it would be an opportunity for the investors to switch their investments. This would, keep companies performing in the best possible way.  
Bombay Stock Exchange Limited is the oldest stock exchange in Asia with a rich heritage, popularly known as 'BSE'. It was established as " The Native Share and Stock Brokers Association" in 1875. the first stock exchange in the country to obtain permanent recognition in 1956 from the Government of India under the Securities Contracts (Regulation) Act, 1956. The pivotal and pre-eminent role of BSE in the development of the Indian capital market is widely recognized.
Earlier BSE was an Association of Persons (AOP) but now it is demutualised and corporatized entity which is incorporated under the provisions of the Companies Act 1956. BSE received its Certificate of Incorporation on 8th August 2005, and Certificate of Commencement of Business on 12th Aug, 2005. The name has been changed to `Bombay Stock Exchange Limited.'
The operations and dealings of BSE are fully computerized and thus the auction system of share trading was replaced by screen based trading known as BOLT (Bombay On Line Trading System) as in other stock exchange around the world. The BSE Sensex (Sensitive Index) also called the BSE 30, is widely, used.
The strategic objectives of BSE are as follows :
·                     To promote, develop and maintain a well regulated market for dealings in securities.
·                     To safeguard the interest of members and the investing public having dealings on the exchange. To promote industrial development in the country through efficient resource mobilization by way of investment in corporate securities.
·                     To establish and promote honourable and fair practices in securities transactions.
          BSE WEBX CO. IN:
          BSE has launched internet trading system viz BSEWebx. Co. in - February 2001 with a view to provide an additional facility to the investors to put their orders for purchase or sale of securities using internet.
          The investors can visit BSE search of their member broker or sub broker and register with them on line trading world wide. The exchange provides an efficient and transparent market for trading in securities.
          BSE scrip is known by code no. For Example Infosys Tech- BSE Code- 500209. Its index is sensex.
          BSE is among the 8 biggest stock exchanges in the world in terms of transaction volume. The exchange has a nation-wide reach with a presence in 417 cities and towns of India. The systems and process of the Exchange are designed to safeguard market integrity and enhance transparency in operations.
          The clearing and settlement functions of the BSE are ISO 9001-2000 certified.
·                     Management of BSE : The exchange is professionally managed under the overall direction of the Board of Directors, Governing Body, or Executive Committee. The Board comprises of eminent professionals, representatives of trading members and the Managing Director of the Exchange. The day-to-day operations of the exchange are managed by the managing Director and CEO and an expert Management Team of Professionals.

NSE is an All-India level stock exchange. It was incorporated in November 1992. It offers online trading system matching to international standards.
The main features of NSE are as follows :
·                     It has nationwide coverage. The investor can make dealing through NSEI dealer.
·                     NSE is the first stock exchange in the world which uses communication technology for trading its securities. It is fully computerized, screen based and ringless system.
·                     It allows the investors to trade their securities from their offices or homes through network with direct satellite link up.
·                     There is transparency in dealings. The investors can check the exact price at which their transactions took place.
·                     NSE is a company promoted by IDBI, ICICI, LIC, GIC and its subsidiaries, commercial banks, SBI capital market limited.
·                     The establishment of the NSE is an important step in upgrading trading facilities for investors and bringing Indian financial markets in line with international markets.
·                     The Index of NSE is called as 'The broader 50 share- NIFETY'.

Equities are considered the most challenging and rewarding as compared to other investment options. Equities have the potential to appreciate in value over time. They can provide an investor's portfolio with the growth necessary to reach his longterm investment goals. Longer tenure of investment can yield for superior returns. However, all equity investments does not guarantee high returns. Equities are high risk investment. One needs to be selective while taking the risk. A carful study before investing into equities definitely prove beneficial. 
Following is the diagrammatic presentation of how a transaction takes place?

Opening Demat Account
Selection of a broker
Getting Unique Client No.
Entering ISIN of Scrip
Placing of the order
Contract Note

·                     Procedure
          There are two ways to deal with investments in securities.
1.       An investor can invest directly in response to an issuing company's appeal i.e. IPO Public Issue i.e. (Primary Market)
2.       Investment from stock exchange i.e. secondary market
          While an investor purchases his shares from primary market, he needs to open Demat Account­ where shares are parked on electronic mode. Shares can be resold- or additional purchasing could be done here as represented in the diagram
1.       Demat Account is opened.
2.       Selection of a broker i.e. an authorized broker: approved by stock exchange
3.       Getting unique client No. (Client ID)
4.       Entering ISIN No. of scrip i.e. No of shares to be purchased or sold.
5.       Placing of the order.
6.       Completing a contract note and
7.       Settlement of the transaction
Collect news clippings about IPO issue of shares and discuss it in the class.

The capital market in India has witnessed tremendous growth since the beginning of 1990s when the process of liberalization initially was started. Under the impact of liberalization the industrial and financial policies were restructured. Resource mobilization in the stock markets was started increasing significantly. The liberalized investment policy of the Government, streamlining of industrial licensing policies and fiscal incentive to industry have led to the growth of the capital market significantly.
With ever expanding response of investors and growing stock exchange operations, several malpractices started taking place on the part of companies, brokers, investment consultants. Some of the undesirable practices like insider trading, delay in allotment of shares, inadequate information to investors started disturbing the smooth functioning of the market. This has started discouraging the common investor from investing into securities. Hence, there felt the need to set up an exclusive monitoring institution which would regulate the working of stock exchange.
The Government of India established the market watchdog SEBI i.e. Securities and Exchange Board of India (SEBI) in April 1988. SEBI as security exchange board of India became a statutory body under SEBI Act 1992, and its head office is located at Mumbai. At present SEBI has offices in Mumbai, Calcutta, New Delhi and Chennai.

Objectives of SEBI

The main objectives of SEBI are as under
·                     To promote fair dealing by the issuers of securities and to ensure a market place where companies or institutions can raise funds at a relatively low cost.
·                     To provide protection to the investors and protect their rights and interests so that there is a steady flow of savings into the market. 
·                     To regulate and develop a code of conduct and fair practice by intermediaries like brokers etc. with a view to make them competitive and professional.

Functions of SEBI
·                     Regulating the business in stock exchanges and any other securities market.
·                     Registering and regulating the working of stock brokers, share transfer agents, sub brokers, bankers to an 'issue, etc.
·                     Promoting and regulating self regulatory organizations.
·                     Prohibiting fraudulent and unfair trade practices relating to securities market.
·                     Registering and regulating the working of venture capital funds and collective investment schemes including mutual funds.
·                     Promoting investors education and training of intermediaries of securities market.
·                     Prohibiting insider trading in securities.
·                     Conducting research and carrying out publications.
·                     Calling for information from undertaking inspection, conducting inquiries and audits of stock exchanges and market intermediaries.

Powers of SEBI
SEBI has been given wide powers. Some of them are as follows.
·                     SERI can ask stock exchanges to maintain the'prescribed documents and records.         
·                     SEBI may ask a stock exchange or any member to fizrnish information and explanation concerning its affairs.
·                     SEBI can approve and amend bye-laws of stock exchanges. It can call periodical returns from stock exchanges.
·                     SEBI can license dealers in securities in some areas.
·                     It can ask a public limited company to list its shares and play supportive role when share market -is bearish. When an individual investor and even speculators try to play shy in stock market ( it means to hesitate to transact) it is the institutional investor who often accounts for bulk of trade. This helps sustaining for stock exchanges.
Terms relating to stock exchange
·                     Listing of securities : Listing of securities means incorporating the name of a company for its security in the official register of the stock exchange. Listing helps companies to get broader market for their securities.
·                     Stock Broker : He is a commission agent who transacts business on behalf of non-members but he himself is a member of a stock exchange who is licensed by stock exchange to buy or sell shares on his client's behalf.
·                     Jobber : A jobber is a dealer in stock exchange who carries on trading of securities in his own name. He is a professional speculator in the stock exchange. He is not permitted to deal with investors directly.
·                     Bull (Tejiwala) : A speculator who expects the price of a particular share to rise in the future and speculates with the hope of selling them at the higher prices to earn profits. His views are optimistic.
·                     Bear (Mandiwala) : A speculator who expects fall in the price of a security. He buys at a lesser price and sells at a little higher price.
·                     Stag : The stags are those who in general do not invest in the secondary market- Instead, they prefer to make their investment in the primary markets when new issues are made.
·                     Contract Note : It is a note given by a broker to his client. It will be in a specific form. It validates the transaction. Both the broker and the client will have one copy each immediately after the transaction within 24 hours.
·                     Trading Ring : The trading or auction of shares takes place on the floor of the stock exchange which is also known as Trading Ring. Trading takes place during. trading hours which is usually between 12 noon to 2.30 P.M. in most of the stock exchanges.                  -
·                     Auction : The method of making offers and bids for shares or determining the prices of securities by auction by buyers and sellers transacting at a specified location.
·                     Institutional Investor : Mutual funds, unit trust, insurance companies, banks, financial institutions which make investment. in shares and bonds are termed as institutional investors. Since these institutes trade in large volumes they often play supportive role when share market is 'bearish. When an individual investor and even speculators try to play shy in stock market (it means to hesitate to transact) it is the institutional investor who often accounts for bulk of trade. This helps in sustaining for stock exchanges.


Meaning of stock exchange : A specific place where trading of the securities is arranged in an organized manner. Stock exchange is a market for securities.
Organization : The stock exchange can be organized in one of the three forms.
a.       Voluntary. non-profit making association
b.       Companies with liability limited by shares
c.       Companies limited by guarantee
Membership : The membership of the stock exchange is given only to individual persons of good moral character, competent, experienced and financially sound.
Management of stock exchange : An executive committee is constituted at each exchange to look after management. It is also known as Governing body, who looks after the management of stock exchange.
·        Role of stock exchange in the capital market
          ®      Encourages capital formation
®      Resource mobilization
®      Helps in rapid economic development
®      Flexibility in investment
          ®      Value addition to securities
·        Functions of stock exchange
          ®      Liquidity
®      Promotes capital formation
®      Fair evaluation of securities
®      Protects investors interest
®      Economic barometer
®      Motivation to management
®      Best utilization of capital
·        Bombay Stock Exchange (BSE) : BSE is the oldest stock exchange in Asia established as Native Share and Stock Brokers Association in 1875. BSE is among 8 biggest stock exchanges in the world in terms of transaction volume.
·        National Stock Exchange : An all India level stock exchange incorporated in Nov 1992. It offers online trading system matching to international standards. NSE is a company promoted by IDBI, ICICI, LIC and its subsidiaries. The establishment of the NSE is an important step in upgrading the facilities of trading securities.
·        Role of SEBI : The' SEBI was established in the, -year 1988 and later in 1992 became a statutory body. SEBI performs the following functions
®      Regulating the business in stock exchange
®      Promoting self regulatory organization
®      Prohibiting fraudulent practices
®      Promoting investors education
®      Prohibiting insider trading
·        Powers of SEBI
®      Can ask for maintaining documents
®      Can ask for information
®    Can amend bye laws
®    Can call for periodical returns

Q.1    A       Select the correct answer from the possible choices given below and rewrite the statements .
          1.       BSE was established in ................
                   a) 1875 b) 1850 c) 1975
          2.       The trading system on BSE is known as ................
                   a) BOLT  b) OTCEI    c) NSE                                                            -
          3.       An Institution which regulates and controls the activities of the stock exchange is called
                   a) NSE  b) BSE    c) SEBI
          4.       A ................. is a professional speculator in the stock exchange.
                   a) Broker  b) Tejiwala  c) Jobber
          5.       Stock exchange is a place where ................. are bought and sold.
                   a) Goods   b) Services        c) Securities
          6.       Stock exchanges function under the control of .................
                   a) Members   b) SEBI c) Securities registration committee
          7.       The oldest stock exchange in Asia is ...................
                   a) Bombay Stock Exchange  b) NSE  c) Calcutta Stock Exchange

Q.1    B       Match the pairs .
                   Group                        Group B
                   a)  SEBI                      1.  Sensex
                   b)  Stock Exchange       2.  Primary market
                   c)  BOLT                     3.  Auction
                   d)  BEAR                     4.  Screen based trading
                                                     5.  Optimistic about rise in prices of securities
                                                     6.  Pessimistic about fall in prices of securities
                                                     7.  Secondary market
                                                     8.  Machinery regulating. stock exchanges

                   Group A                     Group B
                   a)  Primary Market       1.  Transacts in his own name
                   b)  SUFTY                    2.  Mandiwala
                   c)  Secondary Market    3.  Stock Exchange
                   d)  Jobber                   4.  Middleman
                                                     5.  Government Company
                                                     6.  Selling of new securities
                                                     7.  B SSE
                        8.  NSE

Q.1    C       Write a word or at. term or a phrase which can substitute each of the following statements
          1.       The floor of the stock exchange where the trading auction of shares, bikes place.
          2.       The place whom buying and selling of securities takes place.
          3.       The institution which regulates business in stock exchange.
          4.       A single and most important institution in the secondary market for securities.
          5.       The market where investors directly apply to the issuer company for allotment of shares.

Q.2    Distinguish between the following .
          1.       Jobber and Broker
          2.       Primary and Secondary market

Q.3    Write notes on.
          1.       Role of stock exchange in capital market
          2.       Functions of SEBI
          3.       Bombay stock exchange
          4.       Powers of SEBI

Q.4    State, with reasons, whether the following statements are True or False .
          1.       Stock exchange is a place, of buying and selling securities.
          2.       There is no control on stock exchange.
          3.       Stock exchange is a Primary Market.
          4.       The objective of SEBI is to protect interest of the companies.
          5.       Stock exchanges reflect financial progress of the country.
          6.       Securities market is an unorganized market in India.

Q.5    Answer in brief .
          1.       Define stock exchange.
          2.       Explain the organization of stock exchange.
          3.       State any two functions of stock exchange.
          4.       Explain the following Terms
                   · Bear     · Bull        · Stag       · Jobber     · Contract Note

Q.6    Answer the following questions .
          1.       What is stock exchange? Explain the functions of stock exchange.
          2.       Explain the role of stock exchange in the capital market.
          3.       Give brief outline of BSE and NSEI.
          4.       Explain the role of SEBI in monitoring the stock exchanges.