stock exchanges are meant to facilitate mobilization of resources by companies. Their effective regulation is required for protecting the interests of investors and safeguarding their developmental role.
The Securities Contracts (Regulation) Act 1956 along with the Securities Contracts (Regulation) Rules 1957 has been the main laws to regulate the securities market in India. As per the Securities Contracts Regulations Act, 1956, a 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 business in buying, selling and dealing in securities”. A look at the powers given to stock exchanges in India to make and enforce by laws under the Act and the rules reveals that Indian Stock Exchanges have been envisaged as self-regulatory organizations.
Growth of Stock Exchanges
The history of Stock Exchanges in India goes back to the eighteenth century, when securities of the East India Company were transacted. There were 50-60 brokers led by the legendary Premchand Roychand. They formed the backbone of share floatation by East India Company and a few commercial banks. Corporate shares made their entry in the 1830s and assumed significance with the enactment of the Companies Act in the 1850s. The Bombay Stock Exchange, the oldest stock exchange in India was established in 1875 under the name, “Share and Stockbrokers Association”.
The stock exchanges are tightly regulated as self-regulatory organizations (SROs) under the Act. In addition to ordinary regulatory powers over the stock exchanges, the Central Government and/or SEBI may nominate up to three members to the board of each stock exchange [Section 4(2)
(iii) of the SC(R) Act, 1956 and Section 10 of SC(R) Rules, 1957]. The government and/or the agency have the authority to make, approve and amend the byelaws of the stock exchanges [Section 4(1)(a) & 8 of the SC(R) Act, 1956]. In return, the stock exchanges have been granted a strong disciplinary authority (as well as obligations) over their member stockbrokers.
Leading Stock Exchanges in India:
The two leading stock exchanges in India are Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). A brief about them is as under:
(a) Bombay Stock Exchange Limited: It is the oldest stock exchange in Asia and was established as "The Native Share & Stock Brokers Association" in 1875. It is 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 Exchange's pivotal and pre-eminent role in the development of the Indian capital market is widely recognized and its index, SENSEX, is tracked worldwide. Initially, an Association of Persons (AOP), the Exchange is now a demutualised and corporatized entity incorporated under the provisions of the Companies Act, 1956, pursuant to the BSE (Corporatisation
and Demutualisation) Scheme, 2005 notified by the Securities and Exchange Board of India (SEBI).The systems and processes of the Exchange are designed to safeguard market integrity and enhance transparency in operations.
The Exchange provides an efficient and transparent market for trading in equity, debt instruments and derivatives. The BSE's On Line Trading System (BOLT) is a proprietary system of the Exchange and is BS 7799-2-2002 certified. The surveillance and clearing & settlement functions of the Exchange are ISO 9001:2000 certified.
(a) National Stock Exchange: Report of the High Powered Study Group on Establishment of New Stock Exchanges recommended promotion of a National Stock Exchange by financial institutions (FIs) to provide access to investors from all across the country on an equal footing. It was incorporated in November 1992 as a tax-paying company unlike other stock exchanges in the country.
On its recognition as a stock exchange under the Securities Contracts (Regulation) Act, 1956 in April 1993, NSE commenced operations in the Wholesale Debt Market (WDM) segment in June 1994. The Capital Market (Equities) segment commenced operations in November 1994 and operations in Derivatives segment commenced in June 2000.
It uses satellite communication technology to energize participation from around 320 cities spread all over the country. NSE can handle up to 6 million trades per day in Capital Market segment.
NSE is one of the largest interactive Very Small Aperture Terminal (VSAT) based stock exchanges in the world. It supports more than 3000 VSATs. The NSE- network is the largest private wide area network in the country and the first extended C- Band VSAT network in the world. Currently more than 9000 users are trading on the real time-online NSE application. There are over 15 large computer systems which include non-stop fault-tolerant computers and high end UNIX servers, operational under one roof to support the NSE applications. This coupled with the nationwide VSAT network makes NSE the country's largest Information Technology user.
Stock Exchanges Abroad
With the increasing globalization and liberalization, the prices of securities on Indian stock exchanges are influenced by stock exchanges abroad. Under this heading we have tried to give a brief introduction of the major stock exchanges abroad.
(a) New York Stock Exchange (NYSE): The New York Stock Exchange was established more than 200 years ago in 1792. NYSE is the world’s foremost securities marketplace.
Each day on the NYSE trading floor an auction takes place. Open bid and offers are managed on the Trading Floor by Exchange members acting on behalf of institutions and individual investors. Buy and sell orders for each listed security meet directly on the trading floor in assigned locations. Prices are determined through supply and demand. Stocks buy and sell orders funnel through a single location, ensuring that the investor, no matter how big or small, is exposed to a wide range of buyers and sellers.
(a) Nasdaq: Nasdaq is known for its growth, liquidity, depth of market and the world’s most powerful, forward-looking technologies. All these make Nasdaq choice of the leading companies worldwide. Since its inception in 1971, Nasdaq has steadily outpaced the other major markets to become the fastest-growing stock market in the U.S. Nasdaq is a screen-based market, operating in an efficient, highly competitive electronic trading environment.
As the market for Nasdaq’s largest and most actively traded securities, the Nasdaq National Market lists more than 4,000 securities. To be listed on the National Market, a company must satisfy stringent financial, capitalization, and corporate governance standards. Nasdaq National Market companies include some of the largest, best known companies in the world.
In contrast to traditional floor-based stock markets, Nasdaq has no single specialist through which transactions pass. Nasdaq’s market structure allows multiple market participants to trade stock through a sophisticated computer network linking buyers and sellers from around the world. Together, these participants help ensure transparency and liquidity for a company’s stock while maintaining an orderly market and functioning under tight regulatory controls.
(b) London Stock Exchange: Its history goes back to 1760 when 150 brokers kicked out of the Royal Exchange for rowdiness formed a club at Jonathan’s Coffee House to buy and sell shares. In 1773, members voted to change the name to Stock Exchange and 2000 shareholders voted it to become a public limited company and thus London Stock Exchange was formed. Dealing in shares is conducted via an off-market trading facility operated by Cazenove and Co.
London Stock Exchange provides a range of services for companies and investors:
(i) Company Services - It provides a number of markets which allow companies large and small to raise capital, and a range of services to increase the profile of the companies.
(ii) Trading Services - It gives market users access to a well-developed trading environment with a proven record of stability and flexibility.
(iii) Information Services - It provides high quality real-time price information to market users worldwide, as well as historical and reference data.
Supporting these activities, the exchange regulates the markets to give protection to investors and companies and to maintain its reputation for high standards and integrity. In addition, in partnership with others, it helps to track the performance of the markets through various indices.
Characteristics of Stock Exchanges in India
Traditionally, a stock exchange has been an association of individual members called member brokers (or simply members or brokers), formed for the express purpose of regulating and facilitating the buying and selling of securities by the public and institutions at large. A stock exchange in India operates with due recognition from the Government under the Securities & Contracts (Regulations) Act, 1956. Corporate membership of stock exchanges has also been introduced lately. As you know, there are at present 20 stock exchanges in India.
A stock exchange is typically governed by a board, consisting of directors. Some Members of the Board are nominated by the Government. Government nominees include representatives of the Ministry of Finance, as well as some public representatives, who are expected to safeguard the interest of investors in the functioning of the exchanges. The board is headed by a President, who is an elected member, usually nominated by the government, from among the elected members. The Executive Director, who is appointed by the stock exchange with government approval, is the operational chief of the stock exchange. His duty is to ensure that the day-to-day operations of the stock exchange are carried out in accordance with the rules and regulations governing its functioning. Securities and Exchanges Board of India (SEBI) has been set up in Mumbai by the Government to oversee the orderly development of stock exchanges in the country. All companies wishing to raise capital from the public are required to list their securities on at least one stock exchange. Thus, all ordinary shares, preference shares and debentures of publicly held companies are listed in one or more stock exchanges. Stock exchanges also facilitate trading in the securities of the public sector companies as well as government securities.
Functions of Stock Exchanges
The Stock Exchange is a market place where investors buy and sell securities. Functions of the stock exchanges can be summarized as follows:
(a) Liquidity and Marketability of Securities: The basic function of the stock market is the creation of a continuous market for securities, enabling them to be liquidated, where investors can convert their securities into cash at any time at the prevailing market price. It also provides investors the opportunity to change their portfolio as and when they want to change, i.e. they can at any time sell one security and purchase another, thus giving them marketability.
(b) Fair Price Determination: This market is almost a perfectly competitive market as there are large number of buyers and sellers. Due to nearly perfect information, active bidding take place from both sides. This ensures the fair price to be determined by demand and supply forces.
(c) Source for Long term Funds: Corporates, Government and public bodies raise funds from the equity market. These securities are negotiable and transferable. They are traded and change hands from one investor to the other without affecting the long-term availability of funds to the issuing companies.
(d) Helps in Capital Formation: There is nexus between the savings and the investments of the community. The savings of the community are mobilized and channeled by stock exchanges for investment into those sectors and units which are favoured by the community at large, on the basis of such criteria as good return, appreciation of capital, and so on. It is the preference of investors for individual units as well as industry groups, which is reflected in the share price that decides the mode of investment. Stock exchanges render this service by arranging for the preliminary distribution of new
issues of capital, offered through prospectus, as also offers for sale of existing securities, in an orderly and systematic manner. They themselves administer the same, by ensuring that the various requisites of listing (such as offering at least the prescribed minimum percentage of capital to the public, keeping the subscription list open for a minimum number of days, making provision for receiving applications at least at the prescribed centres, allotting the shares against applications on a fair and unconditional basis) are duly complied with.
Members of stock exchanges also assist in the flotation of new issues by acting (i) as brokers, in which capacity they, inter alia, try to procure subscription from investors spread all over the country, and (ii) as underwriters. Stock exchanges also provide a forum for trading in rights shares of companies already listed, thereby enabling a new class of investors to take up a part of the rights in the place of existing shareholders who renounce their rights for monetary considerations.
(a) Reflects the General State of Economy: The performance of the stock markets reflects the boom and depression in the economy. It indicates the general state of the economy to all those concerned, who can take suitable steps in time. The Government takes suitable monetary and fiscal steps depending upon the state of the economy.
Basics of Stock Market Indices
Stock Market Index: It is representative of the entire stock market. Movements of the index represent the average returns obtained by investors in the stock market. A base year is set along with a basket of base shares. The change in the market price of these shares is calculated on a daily basis. The shares included in the index are those shares which are traded regularly in high volume. In case the trading in any share stops or comes down then it gets excluded and another company’s shares replaces it.
Each stock exchange has a flagship index like in India, Sensex of BSE and Nifty of NSE and outside India is Dow Jones, FTSE etc.
Concept behind Fluctuations of Index: Stocks are valued by discounting future earnings of a company; therefore, stock indices reflect expectation about future performance of the companies listed in the stock market or performance of the industrial sector. When the index goes up, the market thinks that the future returns will be higher than they are at present and vice versa.
Stock prices are sensitive to Company specific news and Country specific news (which includes budget, elections, government policies, wars and so on)
Computation of Index: Following steps are involved in calculation of index on a particular date:
The Securities Contracts (Regulation) Act 1956 along with the Securities Contracts (Regulation) Rules 1957 has been the main laws to regulate the securities market in India. As per the Securities Contracts Regulations Act, 1956, a 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 business in buying, selling and dealing in securities”. A look at the powers given to stock exchanges in India to make and enforce by laws under the Act and the rules reveals that Indian Stock Exchanges have been envisaged as self-regulatory organizations.
Growth of Stock Exchanges
The history of Stock Exchanges in India goes back to the eighteenth century, when securities of the East India Company were transacted. There were 50-60 brokers led by the legendary Premchand Roychand. They formed the backbone of share floatation by East India Company and a few commercial banks. Corporate shares made their entry in the 1830s and assumed significance with the enactment of the Companies Act in the 1850s. The Bombay Stock Exchange, the oldest stock exchange in India was established in 1875 under the name, “Share and Stockbrokers Association”.
The stock exchanges are tightly regulated as self-regulatory organizations (SROs) under the Act. In addition to ordinary regulatory powers over the stock exchanges, the Central Government and/or SEBI may nominate up to three members to the board of each stock exchange [Section 4(2)
(iii) of the SC(R) Act, 1956 and Section 10 of SC(R) Rules, 1957]. The government and/or the agency have the authority to make, approve and amend the byelaws of the stock exchanges [Section 4(1)(a) & 8 of the SC(R) Act, 1956]. In return, the stock exchanges have been granted a strong disciplinary authority (as well as obligations) over their member stockbrokers.
Leading Stock Exchanges in India:
The two leading stock exchanges in India are Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). A brief about them is as under:
(a) Bombay Stock Exchange Limited: It is the oldest stock exchange in Asia and was established as "The Native Share & Stock Brokers Association" in 1875. It is 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 Exchange's pivotal and pre-eminent role in the development of the Indian capital market is widely recognized and its index, SENSEX, is tracked worldwide. Initially, an Association of Persons (AOP), the Exchange is now a demutualised and corporatized entity incorporated under the provisions of the Companies Act, 1956, pursuant to the BSE (Corporatisation
and Demutualisation) Scheme, 2005 notified by the Securities and Exchange Board of India (SEBI).The systems and processes of the Exchange are designed to safeguard market integrity and enhance transparency in operations.
The Exchange provides an efficient and transparent market for trading in equity, debt instruments and derivatives. The BSE's On Line Trading System (BOLT) is a proprietary system of the Exchange and is BS 7799-2-2002 certified. The surveillance and clearing & settlement functions of the Exchange are ISO 9001:2000 certified.
(a) National Stock Exchange: Report of the High Powered Study Group on Establishment of New Stock Exchanges recommended promotion of a National Stock Exchange by financial institutions (FIs) to provide access to investors from all across the country on an equal footing. It was incorporated in November 1992 as a tax-paying company unlike other stock exchanges in the country.
On its recognition as a stock exchange under the Securities Contracts (Regulation) Act, 1956 in April 1993, NSE commenced operations in the Wholesale Debt Market (WDM) segment in June 1994. The Capital Market (Equities) segment commenced operations in November 1994 and operations in Derivatives segment commenced in June 2000.
It uses satellite communication technology to energize participation from around 320 cities spread all over the country. NSE can handle up to 6 million trades per day in Capital Market segment.
NSE is one of the largest interactive Very Small Aperture Terminal (VSAT) based stock exchanges in the world. It supports more than 3000 VSATs. The NSE- network is the largest private wide area network in the country and the first extended C- Band VSAT network in the world. Currently more than 9000 users are trading on the real time-online NSE application. There are over 15 large computer systems which include non-stop fault-tolerant computers and high end UNIX servers, operational under one roof to support the NSE applications. This coupled with the nationwide VSAT network makes NSE the country's largest Information Technology user.
Stock Exchanges Abroad
With the increasing globalization and liberalization, the prices of securities on Indian stock exchanges are influenced by stock exchanges abroad. Under this heading we have tried to give a brief introduction of the major stock exchanges abroad.
(a) New York Stock Exchange (NYSE): The New York Stock Exchange was established more than 200 years ago in 1792. NYSE is the world’s foremost securities marketplace.
Each day on the NYSE trading floor an auction takes place. Open bid and offers are managed on the Trading Floor by Exchange members acting on behalf of institutions and individual investors. Buy and sell orders for each listed security meet directly on the trading floor in assigned locations. Prices are determined through supply and demand. Stocks buy and sell orders funnel through a single location, ensuring that the investor, no matter how big or small, is exposed to a wide range of buyers and sellers.
(a) Nasdaq: Nasdaq is known for its growth, liquidity, depth of market and the world’s most powerful, forward-looking technologies. All these make Nasdaq choice of the leading companies worldwide. Since its inception in 1971, Nasdaq has steadily outpaced the other major markets to become the fastest-growing stock market in the U.S. Nasdaq is a screen-based market, operating in an efficient, highly competitive electronic trading environment.
As the market for Nasdaq’s largest and most actively traded securities, the Nasdaq National Market lists more than 4,000 securities. To be listed on the National Market, a company must satisfy stringent financial, capitalization, and corporate governance standards. Nasdaq National Market companies include some of the largest, best known companies in the world.
In contrast to traditional floor-based stock markets, Nasdaq has no single specialist through which transactions pass. Nasdaq’s market structure allows multiple market participants to trade stock through a sophisticated computer network linking buyers and sellers from around the world. Together, these participants help ensure transparency and liquidity for a company’s stock while maintaining an orderly market and functioning under tight regulatory controls.
(b) London Stock Exchange: Its history goes back to 1760 when 150 brokers kicked out of the Royal Exchange for rowdiness formed a club at Jonathan’s Coffee House to buy and sell shares. In 1773, members voted to change the name to Stock Exchange and 2000 shareholders voted it to become a public limited company and thus London Stock Exchange was formed. Dealing in shares is conducted via an off-market trading facility operated by Cazenove and Co.
London Stock Exchange provides a range of services for companies and investors:
(i) Company Services - It provides a number of markets which allow companies large and small to raise capital, and a range of services to increase the profile of the companies.
(ii) Trading Services - It gives market users access to a well-developed trading environment with a proven record of stability and flexibility.
(iii) Information Services - It provides high quality real-time price information to market users worldwide, as well as historical and reference data.
Supporting these activities, the exchange regulates the markets to give protection to investors and companies and to maintain its reputation for high standards and integrity. In addition, in partnership with others, it helps to track the performance of the markets through various indices.
Characteristics of Stock Exchanges in India
Traditionally, a stock exchange has been an association of individual members called member brokers (or simply members or brokers), formed for the express purpose of regulating and facilitating the buying and selling of securities by the public and institutions at large. A stock exchange in India operates with due recognition from the Government under the Securities & Contracts (Regulations) Act, 1956. Corporate membership of stock exchanges has also been introduced lately. As you know, there are at present 20 stock exchanges in India.
A stock exchange is typically governed by a board, consisting of directors. Some Members of the Board are nominated by the Government. Government nominees include representatives of the Ministry of Finance, as well as some public representatives, who are expected to safeguard the interest of investors in the functioning of the exchanges. The board is headed by a President, who is an elected member, usually nominated by the government, from among the elected members. The Executive Director, who is appointed by the stock exchange with government approval, is the operational chief of the stock exchange. His duty is to ensure that the day-to-day operations of the stock exchange are carried out in accordance with the rules and regulations governing its functioning. Securities and Exchanges Board of India (SEBI) has been set up in Mumbai by the Government to oversee the orderly development of stock exchanges in the country. All companies wishing to raise capital from the public are required to list their securities on at least one stock exchange. Thus, all ordinary shares, preference shares and debentures of publicly held companies are listed in one or more stock exchanges. Stock exchanges also facilitate trading in the securities of the public sector companies as well as government securities.
Functions of Stock Exchanges
The Stock Exchange is a market place where investors buy and sell securities. Functions of the stock exchanges can be summarized as follows:
(a) Liquidity and Marketability of Securities: The basic function of the stock market is the creation of a continuous market for securities, enabling them to be liquidated, where investors can convert their securities into cash at any time at the prevailing market price. It also provides investors the opportunity to change their portfolio as and when they want to change, i.e. they can at any time sell one security and purchase another, thus giving them marketability.
(b) Fair Price Determination: This market is almost a perfectly competitive market as there are large number of buyers and sellers. Due to nearly perfect information, active bidding take place from both sides. This ensures the fair price to be determined by demand and supply forces.
(c) Source for Long term Funds: Corporates, Government and public bodies raise funds from the equity market. These securities are negotiable and transferable. They are traded and change hands from one investor to the other without affecting the long-term availability of funds to the issuing companies.
(d) Helps in Capital Formation: There is nexus between the savings and the investments of the community. The savings of the community are mobilized and channeled by stock exchanges for investment into those sectors and units which are favoured by the community at large, on the basis of such criteria as good return, appreciation of capital, and so on. It is the preference of investors for individual units as well as industry groups, which is reflected in the share price that decides the mode of investment. Stock exchanges render this service by arranging for the preliminary distribution of new
issues of capital, offered through prospectus, as also offers for sale of existing securities, in an orderly and systematic manner. They themselves administer the same, by ensuring that the various requisites of listing (such as offering at least the prescribed minimum percentage of capital to the public, keeping the subscription list open for a minimum number of days, making provision for receiving applications at least at the prescribed centres, allotting the shares against applications on a fair and unconditional basis) are duly complied with.
Members of stock exchanges also assist in the flotation of new issues by acting (i) as brokers, in which capacity they, inter alia, try to procure subscription from investors spread all over the country, and (ii) as underwriters. Stock exchanges also provide a forum for trading in rights shares of companies already listed, thereby enabling a new class of investors to take up a part of the rights in the place of existing shareholders who renounce their rights for monetary considerations.
(a) Reflects the General State of Economy: The performance of the stock markets reflects the boom and depression in the economy. It indicates the general state of the economy to all those concerned, who can take suitable steps in time. The Government takes suitable monetary and fiscal steps depending upon the state of the economy.
Basics of Stock Market Indices
Stock Market Index: It is representative of the entire stock market. Movements of the index represent the average returns obtained by investors in the stock market. A base year is set along with a basket of base shares. The change in the market price of these shares is calculated on a daily basis. The shares included in the index are those shares which are traded regularly in high volume. In case the trading in any share stops or comes down then it gets excluded and another company’s shares replaces it.
Each stock exchange has a flagship index like in India, Sensex of BSE and Nifty of NSE and outside India is Dow Jones, FTSE etc.
Concept behind Fluctuations of Index: Stocks are valued by discounting future earnings of a company; therefore, stock indices reflect expectation about future performance of the companies listed in the stock market or performance of the industrial sector. When the index goes up, the market thinks that the future returns will be higher than they are at present and vice versa.
Stock prices are sensitive to Company specific news and Country specific news (which includes budget, elections, government policies, wars and so on)
Computation of Index: Following steps are involved in calculation of index on a particular date:
- Calculate market capitalization of each individual company comprising the index.
- v Calculate the total market capitalization by adding the individual market capitalization of all companies in the index.
- v Computing index of next day requires the index value and the total market capitalization of the previous day and is computed as follows:
- Index Value = Index on Previous Day X Total market capitalisation for current day
- Total capitalisation of the previousday
- v It should also be noted that Indices may also be calculated using the price weighted method. Here, the share price of the constituent companies forms the weight. However, almost all equity indices world-wide are calculated using the market capitalization weighted method.
No comments:
Post a Comment