Introduction

The stock market can be a great source of confusion for many people. The average person generally falls into one of two categories. The first believe investing is a form of gambling; they are certain that if you invest, you will more than likely end up losing your money. Often these fears are driven by the personal experiences of family members and friends who suffered similar fates or lived through the Great Depression. These feelings are not ground in facts and are the result of personal experience. Someone who believes along this line of thinking simply does not understand what the stock market is or why it exists. The second category consists of those who know they should invest for the long-run, but dont know where to begin. Many feel like investing is some sort of black-magic that only a few people hold the key to. More often than not, they leave their financial decisions up to professionals, and cannot tell you why they own a particular stock or mutual fund. Their investment style is blind faith or limited to this stock is going up. We should buy it. This group is in far more danger than the first. They invest like the masses and then wonder why their results are mediocre (or in some cases, devastating). Private companies initially sell their stock to the public through a process called an initial public offering. But what if you want to buy and sell shares of a company that is already public? How would you go about finding someone who owns the stock that you wish to buy? And when you're ready to sell, how would you find someone who wants to buy the stock that you own? Obviously, buying and selling public stock would be very difficult without a centralized system for buyers and sellers. Fortunately, there are stock exchanges that provide just such a system, whether it be in a physical building or on a virtual network. This section takes at look at how some of these exchanges operate, how they differ from one another, and the important characteristics of each.

Meaning

Stock Exchange (also called Stock Market or Share Market) is one important constituent of capital market. Stock Exchange is an organized market for the purchase and sale of industrial and financial security. It is convenient place where trading in securities is conducted in systematic manner i.e. as per certain rules and regulations. It performs various functions and offers useful services to investors and borrowing companies. It is an investment intermediary and facilitates economic and industrial development of a country. Stock exchange is an organized market for buying and selling corporate and other securities. Here, securities are purchased and sold out as per certain well-defined rules and regulations. It provides a convenient and secured mechanism / platform for transactions in different securities. Such securities include shares and debentures issued by public companies which are duly listed at the stock exchange, and bonds and debentures issued by government, public corporations and municipal and port trust bodies. Stock exchanges are indispensable for the smooth and orderly functioning of corporate sector in a free market economy. A stock exchange need not be treated as a place for speculation or a gambling den. It should act as a place for safe and profitable investment, for this, effective control on the working of stock exchange is necessary. This will avoid misuse of this platform for excessive speculation, scams and other While Bombay stock exchange (BSE) is the oldest in India, undesirable and anti-social activities. London stock exchange (LSE) is the oldest stock exchange in the world. While Bombay stock exchange (BSE) is the oldest in India. Similar Stock exchanges exist and operate in large majority of countries of the world.

Definition According to Husband and Dockerary "Stock exchanges are privately organized markets which are used to facilitate trading in securities." The Indian Securities Contracts (Regulation) Act of 1956, defines Stock Exchange 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."

History of Stock Market of India

Introduction Stock markets refer to a market place where investors can buy and sell stocks. The price at which each buying and selling transaction takes is determined by the market forces (i.e. demand and supply for a particular stock). Let us take an example for a better understanding of how market forces determine stock prices. ABC Co. Ltd. enjoys high investor confidence and there is an anticipation of an upward movement in its stock price. More and more people would want to buy this stock (i.e. high demand) and very few people will want to sell this stock at current market price (i.e. less supply). Therefore, buyers will have to bid a higher price for this stock to match the ask price from the seller which will increase the stock price of ABC Co. Ltd. On the contrary, if there are more sellers than buyers (i.e. high supply and low demand) for the stock of ABC Co. Ltd. in the market, its price will fall down. In earlier times, buyers and sellers used to assemble at stock exchanges to make a transaction but now with the dawn of IT, most of the operations are done electronically and the stock markets have become almost paperless. Now investors dont have to gather at the Exchanges, and can trade freely from their home or office over the phone or through Internet.

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 1830's 1840's 1850's 1860's 1860-61 East India Company was the dominant institution and by end of the century, business in its loan securities gained full momentum Business on corporate stocks and shares in Bank and Cotton presses started in Bombay. Trading list by the end of 1839 got broader Recognition from banks and merchants to about half a dozen brokers Rapid development of commercial enterprise saw brokerage business attracting more people into the business The number of brokers increased to 60 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 The number of brokers increased to about 200 to 250 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)

1862-63 1865

Pre-Independence 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. "The Native Share and Stock Brokers' Association" (also known as "The Bombay Stock Exchange") was established in Bombay Development of cotton mills industry and set up of many others Establishment of "The Ahmadabad Share and Stock Brokers' Association" Sharp increase in share prices of jute industries in 1870's was followed by a boom in tea stocks and coal "The Calcutta Stock Exchange Association" was formed Madras witnessed boom and business at "The Madras Stock Exchange" was transacted with 100 brokers. When recession followed, number of brokers came down to 3 and the Exchange was closed down Establishment of the Lahore Stock Exchange Merger of the Lahore Stock Exchange with the Punjab Stock Exchange Re-organization 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 Uttar Pradesh Stock Exchange Limited and Nagpur Stock Exchange Limited was established Establishment of "The Hyderabad Stock Exchange Limited" "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"

1875 1880's 1894 1880 - 90's 1908 1920 1923 1934 1936 1937

1940 1944 1947

Post Independence Scenario

The depression witnessed after the Independence led to closure of a lot of exchanges in the country. Lahore E stock Exchange was closed down after the partition of India, and later on merged with the Delhi Stock Exchange. Bangalore 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: 1. 2. 3. 4. 5. 6. 7. 8. Bombay Calcutta Madras Ahmadabad Delhi Hyderabad Bangalore Indore

Many more stock exchanges were established during 1980's, namely: 1. Cochin Stock Exchange (1980) 2. Uttar Pradesh Stock Exchange Association Limited (at Kanpur, 1982) 3. Pune Stock Exchange Limited (1982) 4. Ludhiana Stock Exchange Association Limited (1983) 5. Gwuahati Stock Exchange Limited (1984) 6. Kanara Stock Exchange Limited (at Mangalore, 1985) 7. Magadha Stock Exchange Association (at Patna, 1986) 8. Jaipur Stock Exchange Limited (1989) 9. Bhubaneswar Stock Exchange Association Limited (1989) 10. Saurashtra Kutch Stock Exchange Limited (at Rajkot, 1989) 11. Vadodara Stock Exchange Limited (at Baroda, 1990) 12. Coimbatore Stock Exchange 13. 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 (OTCEI) and the National Stock Exchange of India Limited (NSEIL).

Government policies during 1980's also played a vital role in the development of the Indian Stock Markets. There was a sharp increase in number of Exchanges, listed companies as well as their capital, which is visible from the following table:

S. As on 31st December No. 1 2 3 4 5 6 No. of Stock Exchanges No. of Listed Cos. No. of Stock Issues of Listed Cos. Capital of Listed Cos. (Cr. Rs.) Market value of Capital of Listed Cos. (Cr. Rs.) Capital per Listed Cos. (4/2)(Lakh Rs.)

1946 1961 1971 1975 1980 1985 7 7 8 8 9 14

1991 20 6229 8967 32041

1995 22 8593 11784 59583

1125 1203 1599 1552 2265 4344 1506 2111 2838 3230 3697 6174 270 971 24 753 1812 2614 3973 9723

1292 2675 3273 6750 25302 110279 478121 63 113 168 175 224 514 693

Market Value of Capital per Listed Cos. (Lakh 86 Rs.) (5/2) Appreciated value of Capital per Listed Cos. (Lakh Rs.) 358

107

167

211

298

582

1770

5564

170

148

126

170

260

344

803

Trading Pattern of the Indian Stock Market Indian Stock Exchanges allow trading of securities of only those public limited companies that are listed on the Exchange(s). They are divided into two categories:

Types of Transactions The flowchart below describes the types of transactions that can be carried out on the Indian stock exchanges:

Indian stock exchange allows a member broker to perform following activities: 1. 2. 3. 4. Act as an agent, Buy and sell securities for his clients and charge commission for the same, Act as a trader or dealer as a principal, Buy and sell securities on his own account and risk.

Over The Counter Exchange of India (OTCEI) Traditionally, trading in Stock Exchanges in India followed a conventional style where people used to gather at the Exchange and bids and offers were made by open outcry. This age-old trading mechanism in the Indian stock markets used to create much functional inefficiency. Lack of liquidity and transparency, long settlement periods and became transactions are a few examples that adversely affected investors. In order to overcome these inefficiencies, OTCEI was incorporated in 1990 under the Companies Act 1956. OTCEI is the first screen based nationwide stock exchange in India created by Unit Trust of India, Industrial Credit and Investment Corporation of India, Industrial Development Bank of India, SBI Capital Markets, Industrial Finance Corporation of India, General Insurance Corporation and its subsidiaries and Can Bank Financial Services.

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Advantages of OTCEI 1. Greater liquidity and lesser risk of intermediary charges due to widely spread trading mechanism across India 2. The screen-based scrip less trading ensures transparency and accuracy of prices 3. Faster settlement and transfer process as compared to other exchanges 4. Shorter allotment procedure (in case of a new issue) than other exchanges National Stock Exchange In order to lift the Indian stock market trading system on par with the international standards. On the basis of the recommendations of high powered Pherwani Committee, the National Stock Exchange was incorporated in 1992 by Industrial Development Bank of India, Industrial Credit and Investment Corporation of India, Industrial Finance Corporation of India, all Insurance Corporations, selected commercial banks and others. NSE provides exposure to investors in two types of markets, namely: 1. Wholesale debt market 2. Capital market Wholesale Debt Market - Similar to money market operations, debt market operations involve institutional investors and corporate bodies entering into transactions of high value in financial instruments like treasury bills, government securities, commercial papers etc. Trading at NSE 1. 2. 3. 4. 5. 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 6. When the prices match the transaction will be completed 7. A confirmation slip will be printed at the office of the trading member Advantages of trading at NSE 1. 2. 3. 4. 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

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Features of Stock Exchange:1. Market for securities: Stock exchange is a market, where securities of corporate bodies, government and semi-government bodies are bought and sold. 2. Deals in second hand securities: It deals with shares, debentures bonds and such securities already issued by the companies. In short it deals with existing or second hand securities and hence it is called secondary market. 3. Regulates trade in securities: Stock exchange does not buy or sell any securities on its own account. It merely provides the necessary infrastructure and facilities for trade in securities to its members and brokers who trade in securities. It regulates the trade activities so as to ensure free and fair trade 4. Allows dealings only in listed securities: In fact, stock exchanges maintain an official list of securities that could be purchased and sold on its floor. Securities which do not figure in the official list of stock exchange are called unlisted securities. Such unlisted securities cannot be traded in the stock exchange. 5. Transactions effected only through members: All the transactions in securities at the stock exchange are effected only through its authorized brokers and members. Outsiders or direct investors are not allowed to enter in the trading circles of the stock exchange. Investors have to buy or sell the securities at the stock exchange through the authorized brokers only. 6. Association of persons: A stock exchange is an association of persons or body of individuals which may be registered or unregistered. 7. Recognition from Central Government: Stock exchange is an organized market. It requires recognition from the Central Government. 8. Working as per rules: Buying and selling transactions in securities at the stock exchange are governed by the rules and regulations of stock exchange as well as SEBI Guidelines. No deviation from the rules and guidelines is allowed in any case. 9. Specific location: Stock exchange is a particular market place where authorized brokers come together daily (i.e. on working days) on the floor of market called trading circles and conduct trading activities. The prices of different securities traded are shown on electronic boards. After the working hours market is closed. All the working of stock exchanges is conducted and controlled through computers and electronic system. 10. Financial Barometers: Stock exchanges are the financial barometers and development indicators of national economy of the country. Industrial growth and stability is reflected in the index of stock exchange.

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Functions

1. Continuous and ready market for securities Stock exchange provides a ready and continuous market for purchase and sale of securities. It provides ready outlet for buying and selling of securities. Stock exchange also acts as an outlet/counter for the sale of listed securities. 2. Facilitates evaluation of securities Stock exchange is useful for the evaluation of industrial securities. This enables investors to know the true worth of their holdings at any time. Comparison of companies in the same industry is possible through stock exchange quotations (i.e price list). 3. Encourages capital formation Stock exchange accelerates the process of capital formation. It creates the habit of saving, investing and risk taking among the investing class and converts their savings into profitable investment. It acts as an instrument of capital formation. In addition, it also acts as a channel for right (safe and profitable) investment. 4. Provides safety and security in dealings Stock exchange provides safety, security and equity (justice) in dealings as transactions are conducted as per well defined rules and regulations. The managing body of the exchange keeps control on the members. Fraudulent practices are also checked effectively. Due to various rules and regulations, stock exchange functions as the custodian of funds of genuine investors. 5. Regulates company management Listed companies have to comply with rules and regulations of concerned stock exchange and work under the vigilance (i.e. supervision) of stock exchange authorities. 6. Facilitates public borrowing Stock exchange serves as a platform for marketing Government securities. It enables government to raise public debt easily and quickly

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7. Provides clearing house facility Stock exchange provides a clearing house facility to members. It settles the transactions among the members quickly and with ease. The members have to pay or receive only the net dues (balance amounts) because of the clearing house facility. 8. Facilitates healthy speculation Healthy speculation, keeps the exchange active. Normal speculation is not dangerous but provides more business to the exchange. However, excessive speculation is undesirable as it is dangerous to investors & the growth of corporate sector. 9. Serves as Economic Barometer Stock exchange indicates the state of health of companies and the national economy. It acts as a barometer of the economic situation / conditions. 10. Facilitates Bank Lending Banks easily know the prices of quoted securities. They offer loans to customers against corporate securities. This gives convenience to the owners of securities.

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Introduction of India Stock Exchange India Stock Exchanges can either be a conglomerate/ firm or mutual group. The affiliates act as intermediaries to their patrons or as key players for their own accounts. Stock Exchanges in India also assist the issue and release of securities and other monetary tools incorporating the fortification of revenues and dividends. The book keeping of the trade is centralized but the buying and selling is associated to a particular place as advanced marketplaces are mechanized. The buying and selling on an exchange is only open to its affiliates and brokers.

Scope of Stock Exchange Times are really quite exciting; an ever increasing plethora of events followed the global financial crisis. With globalization and innovation in the financial markets at its peak - it is very essential to study the market risks and requirements. Over the years, the India stock market has undergone major changes to remain at par with the global peers. With global trade and finance getting more dynamic day by day, the India stock market is not far behind to experience these developments. This has helped the financial structure of India get more innovative. Main Players in Stock Exchange The India stock market is steered on by the two exchanges viz, Bombay Stock Exchanges (BSE) and National Stock Exchange (NSE). The trade and business of the entire country is dependant on the performance of these two main stock exchanges. Any minor developments in the economy might push the indexes on these exchanges down or vice versa.

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10 Major Global Stock Exchanges (market capitalization as on August 2009)

Rank Economy 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Market Capitalization (USD Billions) United States NYSE Euronext 15,970 United States NASDAQ OMX 4,931 Japan Tokyo Stock Exchange 3,827 United Kingdom London Stock Exchange 3,613 China Shanghai Stock Exchange 2,717 Hong Kong Hong Kong Stock Exchange 2,711 Canada Toronto Stock Exchange 2,170 India Bombay Stock Exchange 1,631 India National Stock Exchange of India 1,596 Brazil BM&F Bovespa 1,545 Australia Australian Securities Exchange 1,454 Germany Deutsche Brse 1,429 China Shenzhen Stock Exchange 1,311 Switzerland SIX Swiss Exchange 1,229 Spain BME Spanish Exchanges 1,171 South Korea Korea Exchange 1,091 Russia MICEX 949 South Africa JSE Limited 925 Stock Exchange Trade Value (USD Billions) 19,813 13,439 3,787 2,741 4,496 1,496 1,368 258 801 868 1,062 1,628 3,572 788 1,360 1,607 408 340

Strengths of India Stock Market The India stock market boasts of a fully automated trading system on all stock exchanges, provides a wide range of products. It is an integrated platform to trade in both cash and derivatives and has a host of around 4,000 corporate brokers all across India. The stock market of India has made considerable progress following its international peers and the modern market mechanisms have helped them create a niche for themselves. The market regular, Securities and Exchange Board of India (SEBI) plays an important role in the management of the stock exchanges in India. The regulatory methods are sound - in terms of intermediaries, trading mechanism, settlement cycles, risk management, derivative trading. The usage of Information technology is to a large extent responsible for the outstanding performance of the stock markets in India.

The two main players of the India stock market - NSE and BSE have outshone all the other exchanges and majority of the stocks are listed on these two exchanges. The market 16

participants are ever increasing, the volume of securities has been growing, transaction costs are getting reduced, and there is significant improvement in efficiency, transparency and safety. The international standards are well complied with to maintain global standard of performance. Important elements of India stock market

Investors Issuers Intermediaries Regulators

If all these four elements are taken good care of from the onset, a stock market can easily exhibit sound growth and perform exponentially.

Different Stock Exchanges in India

(a) National Stock Exchange (NSE) of India Integrated in November 1992, the National Stock Exchange of India (NSE) was initially a tariff forfeiting association. In 1993, the exchange was certified under Securities Contracts (Regulation) Act, 1956 and in June 1994 it started its business functioning in the Wholesale Debt Market (WDM). The Equities division of NSE began its operations in 1994 while in 2000 the corporation incorporated its Derivatives division. Some NSE Figures and Facts

The equities division of NSE covers around 300 Indian cities, while its derivates section covers 305 cities. The number of securities accessible for buying and selling in NSE exchange in its equities and derivates section are 1,383 and 3,143 respectively. The total amount of Settlement warranty fund in NSE equities division and derivates section are Rs 2,085.25 crores and Rs 6,018.30 crores respectively. The daily turnover of NSE equities division is Rs 10,336.52 crores, for derivates segment is Rs 32,809.96 crores and for Whole sale debt division is Rs 13,911.57 crores.

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NSE uses satellite communication expertise to strengthen contribution from around 400 Indian cities. The exchange administers around rs 1 million of buying and selling on daily basis. It is one of the biggest VSAT incorporated stock exchange across the world. Currently more than 8,500 customers are doing online exchange business on NSE application.

(b) Bombay Stock Exchange (BSE) of India The oldest stock market in Asia, BSE stands for Bombay Stock Exchange and was initially known as "The Native Share & Stock Brokers Association." Incorporated in the 1875, BSE became the first exchange in India to be certified by the administration. It attained a permanent authorization from the Indian government in 1956 under Securities Contracts (Regulation) Act, 1956. Over the year, the exchange company has played an essential part in the expansion of Indian investment market. At present the association is functioning as corporative body integrated under the stipulations of the Companies Act, 1956. Some BSE Figures and Facts

BSE exchange was the first in India to launch Equity Derivatives, Free Float Index, USD adaptation of BSE Sensex and Exchange facilitated Internet buying and selling policy BSE exchange was the first in India to acquire the ISO authorization for supervision, clearance & Settlement BSE exchange was the first in India to have launched private service for economic training Its On-Line Trading System has been felicitated by the internationally renowned standard of Information Security Management System.

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(c) Regional Stock Exchanges (RSE) of India The Regional Stock Exchanges in India started spreading its business operation from 1894. The first RSE to start its functioning in India was Ahmadabad Stock Exchange (ASE) followed by Calcutta Stock Exchange (CSE) in 1908. The stock exchange in India witnessed a flourishing phase in 1980s with the incorporation of many exchanges under it. In early 60s, it has only few certifies RSEs under it namely Hyderabad Stock Exchange, Indore Stock Exchange, Madras Stock Exchange, Calcutta Stock Exchange and Delhi Stock Exchange. The recent to join the list was Meerut Stock Exchange and Coimbatore Stock Exchange. Catalog of Regional Stock Exchanges in India

Ahmadabad Stock Exchange Bangalore Stock Exchange Bhubaneswar Stock Exchange Calcutta Stock Exchange Cochin Stock Exchange Coimbatore Stock Exchange Delhi Stock Exchange Guwahati Stock Exchange Hyderabad Stock Exchange Jaipur Stock Exchange Ludhiana Stock Exchange Madhya Pradesh Stock Exchange Madras Stock Exchange Magadha Stock Exchange Mangalore Stock Exchange Meerut Stock Exchange OTC Exchange Of India Pune Stock Exchange Saurashtra Kutch Stock Exchange Uttar Pradesh Stock Exchange Vadodara Stock Exchange

NSE (National Stock Exchange)

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The National Stock Exchange (NSE) is a stock exchange located at Mumbai, India. It is the 9th largest stock exchange in the world by market capitalization and largest in India by daily turnover and number of trades, for both equities and derivative trading. NSE has a market capitalization of around US$1.59 trillion and over 1,552 listings as of December 2010. 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. The NSE's key index is the S&P CNX Nifty, known as the NSE NIFTY (National Stock Exchange fifty), an index of fifty major stocks weighted by market capitalization. NSE is mutually-owned by a set of leading financial institutions, banks, insurance companies and other financial intermediaries in India but its ownership and management operate as separate entities. There are at least 2 foreign investors NYSE Euro next and Goldman Sachs who have taken a stake in the NSE. As of 2006, the NSE VSAT terminals, 2799 in total, cover more than 1500 cities across India. NSE is the third largest Stock Exchange in the world in terms of the number of trades in equities. It is the second fastest growing stock exchange in the world with a recorded growth of 16.6%.

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