Maharashtra Board Class 12 Secretarial Practice Chapter 12 Stock Exchange PDF Download

Stock Exchange

A Stock Market is an important constituent of Capital market. It is a part of the financial market where corporate securities are bought and sold. It is an organised Capital market where second hand securities are bought and sold for investment and speculation purposes. Only listed Securities can be traded on a stock exchange.

Listed Securities: Securities those are included in the trading list of the stock exchange. To get its securities listed, a company has to apply to the stock exchange and comply with its rules and regulations.

A Stock Exchange is also called as a Secondary Market or Stock Market or Share Market or Share Bazar.

Teacher's Note

A stock exchange is like a big market where people buy and sell shares of companies. Just like we buy vegetables in a vegetable market in India, people buy and sell company shares in a stock exchange.

Exam Trick

Remember: Stock Exchange = Market for buying and selling shares. Think of BSE (Bombay Stock Exchange) as the biggest share market in India, just like the biggest vegetable market in your city.

Points to Remember

Stock exchange is a place where shares are bought and sold.
Only listed companies can sell their shares on a stock exchange.
The stock exchange protects investors by following strict rules.
Brokers help people buy and sell shares in the stock exchange.
SEBI is the body that controls all stock exchanges in India.

Stock Exchange: Meaning

Stock exchange is a specific place where various types of securities are purchased and sold. The term securities include equity shares, preference shares, debentures, government securities and bonds, etc. including units of Mutual Funds. Stock markets act as intermediary between investors and borrowers. To provide safety and stability to the investors, Stock exchanges in India are regulated by SEBI.

London Stock Exchange which was founded in 1571 is the oldest Stock Exchange in the world while Bombay Stock Exchange which was founded in 1875 is the oldest stock exchange in India.

Definitions 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 Dockery have defined stock exchange as "Stock exchanges are privately organized market which are used to facilitate trading in securities."

The important features of a stock exchange are as follows -

1. Market for Securities: Stock exchange is a place where all types of corporate securities as well as securities of government and semi-government bodies are traded.

2. Second Hand Securities: Securities traded in Stock exchange are those securities which are already issued by the companies. In other words, second hand securities are bought and sold among investors in a stock exchange.

3. Listed Securities: Only securities that are listed with the stock exchange can be traded on a stock exchange. Listing of securities helps in protecting the interest of investors as companies have to strictly comply with the rules laid down by the stock exchange.

4. Organised and Regulated Market: All Listed Companies have to comply with the guidelines of SEBI. Companies will also have to function as per the rules and regulations laid down by the Stock exchange.

5. Specific Location: Stock exchange is a specific physical place where securities are traded. It is a market place where brokers and intermediaries meet to conduct dealings in securities. Today, all trading is done electronically on a stock exchange.

6. Trading only through Members: Securities in a Stock exchange can be traded only by the members of the exchange on their own behalf or through authorised brokers.

Management of Stock Exchange

Executive committee of stock exchange looks after the overall activities and management of stock exchange. The composition, powers and the name of the executive committee differs from exchange to exchange. There are other supporting committees to assist the executive committee like advisory committee, listing committee, etc.

Organization Structure of Stock Exchanges in India

In India, the stock exchange may be organized in one of the following three forms.

i) Voluntary non-profit-making organization

ii) Companies with liability limited by shares

iii) Companies with liability limited by guarantee

The Securities Contract (Regulations) Act 1956, provides rules for their functioning, licensing, recognition and for controlling speculations.

Membership of Stock Exchange

The eligibility criteria for membership may differ from stock exchange to stock exchange (For additional information refer website of respective stock exchange.)

Teacher's Note

Different stock exchanges have different rules for who can become a member. Think of it like how different clubs in your school have different rules for membership.

Exam Trick

Remember: Stock exchanges have rules and committees. SEBI watches them like a teacher watches students to keep everything fair and safe.

Points to Remember

Stock exchange must have an executive committee to manage it.
There are three types of organizations for stock exchanges in India.
Not everyone can trade in a stock exchange - only members can.
Each stock exchange can have different rules for membership.
Securities Contracts Act 1956 makes rules for stock exchanges.

Functions of Stock Exchange

1. Mobilisation of Savings: Stock markets are organised and regulated market which protects the interests of the investors. This encourages small and big investors to invest in securities through the stock exchange. It thus provides a ready market for buying and selling securities.

2. Capital formation: Investors in securities are attracted due to good returns on investments and capital appreciation. This attracts more investors to invest through the stock exchange. Corporates too can easily raise funds by offering various types of securities to meet the needs of different types of investors. Thus Stock exchange serves as a tool for capital formation.

3. 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 market value of their investment. The creditors can estimate the credit worthiness of a company.

4. 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 as it reflects the economic conditions of a country.

5. Protecting Interest of Investors: Stock exchange protects the interest of investors. In stock market only the listed securities are traded. Stock exchange allows listing only after verifying the soundness of company. The companies which are listed have to operate within the strict rules and regulations laid down by the stock exchange. This ensures safety of dealing through stock exchange.

6. Liquidity: The main function of stock market is to provide ready market for sale and purchase of securities. The presence of stock 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 or even liquidate their investments whenever they want.

7. 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 prices of securities traded in the exchange indicates the opportunities for investments. So stock exchange facilitates allocation of investors fund to productive and profitable channels.

8. Contributes to Economic Growth: In stock exchange, securities of various companies are bought and sold. Investors invest in companies which give good return on investments. Hence companies, too, try to invest in most productive investment projects. This leads to capital formation as well as economic growth.

9. Providing Scope for Speculation: To ensure liquidity and demand or supply of securities the stock exchange permits healthy speculation of securities.

10. Promotes the Habit 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 gold, silver, etc.

Teacher's Note

Stock exchanges help people save money and earn good returns. In India, many people save money through stock exchanges instead of just keeping cash at home.

Exam Trick

Remember: Stock exchange has 10 functions. The easy ones to remember are: Saving, Capital, Pricing, Economic Barometer, Protection, and Liquidity. These are the most important for exams.

Points to Remember

Stock exchange helps people save money by giving them safe place to invest.
Companies can raise money easily through stock exchange.
Stock exchange shows us if the country's economy is good or bad.
Stock exchange protects investors from fraud and bad companies.
Stock exchange helps people buy and sell shares whenever they want.

Major Stock Exchanges In India

Following are the two most important Stock Exchanges in India.

1. Bombay Stock Exchange (BSE): BSE - Bombay Stock Exchange, was set up in 1875. At that time it was called as The Native Share and Stock Broker's Association. It is located in Dalal Street in Mumbai.

It is Asia's first Stock exchange. It is the first listed stock exchange in India. It is the 11th largest stock exchange in the world in terms of market capitalisation. It has the largest number of companies listed with it. (Approximately over 5000 companies are listed in the BSE.) It is now a demutualised and corporatized entity registered under the Companies Acts, 1956.

The BSE switched to an electronic trading system in 1995. This automated, screen-based trading platform is called BSE On-Line Trading (BOLT). 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.

2. National Stock Exchange (NSE): NSE was set up by a group of leading Indian Financial Institutions in 1992 as a company and was recognized as a Stock Exchange in 1993 under the Securities Contracts (Regulation) Act, 1956. It started trading activities in 1994. It is the largest and most modern stock exchange in India.

The NSE is located in Mumbai. It was the first demutualised electronic exchange in India. 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. The main index of NSE is the NIFTY which was launched in 1996.

Teacher's Note

BSE is the oldest stock exchange in India, started in 1875. NSE is newer but bigger. Both are in Mumbai, which is the financial center of India.

Exam Trick

Remember: BSE = Bombay Stock Exchange (old, 1875), NSE = National Stock Exchange (new, 1992). BSE has 5000 companies, NSE is most modern. Both are in Mumbai.

Points to Remember

BSE was started in 1875 and is Asia's first stock exchange.
NSE was started in 1992 and is the most modern stock exchange.
BSE has more companies listed than NSE.
NSE index is called NIFTY and was started in 1996.
Both BSE and NSE use electronic trading system now.

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