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Role Of Stock Exchange In India Finance Essay

Stock exchange is a corporation or mutual organization which facilitates trading of stock, securities and also facilitates issue and redemption of securities and other financial instruments.

History

BSE stock exchange in India is the oldest stock exchange in Asia. This stock exchange was started by 22 men under a banyan tree in Town Hall, Mumbai .It started functioning in the year 1850; in one year of time stock brokers were increased to 60.Premchand Roy Chand was very famous stock broker at that time he assisted in Setting out traditions, conventions, and procedures for the trading of stocks at Bombay Stock Exchange and they are still being followed. In 1956, the Government of India recognized the Bombay Stock Exchange as the first stock exchange in the country under the Securities Contracts (Regulation) Act .The most decisive period in the history of the BSE took place after 1992.In this year, the famous Harshad Mehta scam took place which rocked the entire stock market and took many investors for a ride. It was a wakeup call for the government, thus came about NSE in 1994 which was proposed by IDBI(Industrial Bank of India). In a span of one year, it recorded a turnover more than BSE . NSE embarked on the launch of equity derivatives trading. BSE responded by appointing a friendly SEBI chairman (D. R. Mehta), who aimed at blocking equity derivatives trading. The BSE and D. R. Mehta succeeded in delaying the onset of equity derivatives trading by roughly five years . Today, NSE has roughly 66% of equity spot turnover and roughly 100% of equity derivatives turnover.15 Stock Exchanges provide a trading platform, where buyers and sellers can meet to transact in securities

Meaning of stock exchange

Stock exchange is an important principal of capital market. It is an organized market for purchasing or selling of securities of listed companies. 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. The main aim of a stock exchange is to mobilize cash flow and provide liquidity to investors ; along with it protect the rights of investors.

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, undesirable and anti-social activities.

Definition of stock exchange

According Indian Securities Contracts (Regulation) Act of 1956, defines Stock Exchange as an organized sector where selling and buying of shares or debentures is done in a systematic way with certain rules and regulations.

Difference between stock market and stock exchange

Stock Markets:

Stock Market is a market where the trading of company stock, both listed securities and unlisted takes place. It is different from stock exchange because it includes all the national stock exchanges of the country.

Stock Exchanges:

Stock Exchanges are an organized marketplace, either corporation or mutual organization, where members of the organization gather to trade company stocks or other securities. The members may act either as agents for their customers, or as principals for their own accounts. Stock exchanges also facilitate the issue and redemption of securities and other financial instruments including the payment of income and dividends. The record keeping is central but trade is linked to such physical place because modern markets are computerized. Trade is carried out on any exchange only by SEBI certified stock brokers. There are three stock exchanges present in India which are NSE, BSE and MCX. MCX is the latest stock exchange which was started in 2003 by JIgnesh Shah. It is the only listed exchange in the country.

Characteristics of stock exchange:-

Market for securities

Stock exchange is a market, where securities of corporate bodies, government and semi-government bodies are bought and sold.

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.

Regulates trade in securities

Stock exchange does not buy or sell any securities in 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

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.

Transactions effected only through members

All the transactions in securities at the stock exchange are effected only through its authorised 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 authorised brokers only.

Association of persons

A stock exchange is an association of persons or body of individuals which may be registered or unregistered.

Recognition from Central Government

Stock exchange is an organized market and has recognition from the Central Government.

Working as per rules

Buying and selling 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.

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 traded securities 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.

The role of stock exchange

Raising capital for business

Mobilizing saving for investment

Facilitating companies’ growth

Profit sharing

Creating investment opportunities for small investors

Barometer of economy

Raising capital for business

There are different ways by which a company can raise capital for its business. It may choose to go through debt or equity route. . Borrowing debt from the public is more prevalent in Europe. In debt route, the company issues debentures to the public in return for the borrowed money. It offers a fixed interest over the capital for a stipulated period of time.

Equity

This concept is famous in U.S and now is gaining popularity in India. “Equity” or “stock” market is also a way through which companies borrow money other than going through debt route. In equity markets there are two types of markets which are primary and secondary markets. The primary market or Initial Public Offer (IPO) is when the company goes public and issues shares for a particular price. Here the company hires an underwriter to oversee the entire IPO process. There are two types of pricing methods which are book building and fixed pricing methods. Once the IPO process is complete and the company has complied with all the SEBI guidelines and regulations of stock exchange it can then enter the secondary market. Basically, in secondary market it gets listed on any of the stock exchange. It can then be traded by brokers and investors with ease.

Mobilizing saving for investment

Stock exchange provides a good platform for mobilizing of funds for various investors. It is a very good medium for long term investors who want capital appreciation for their share value. Return on Investment (ROI) can be defined as a means by which an investor makes profit after tax, inflation or any other cost associated.

Investors also invest in stock markets for short term returns as well as interested in rich dividends, such investors can be termed as short term investors. They want liquidity as soon as possible. These investors are not bothered about long term gains and concentrate on making quick money. The stock exchange is a safe house for investing as it is tightly regulated by SEBI whose aim is to protect the investor’s right in every aspect. It provides liquidity very easily; the settlement period is T+2 days. Many small investors, who want to save money for the future may be for marriage, education or any other activity, invest in equity as one of their portfolios for investment. They invest in anticipation of capital appreciation and good return on investment.

Facilitating companies’ growth

When an unlisted company has to be valued normally it goes for book value method. In this method the company’s assets and liabilities are compared and an estimated amount is reached upon. The value reached upon does not give a clear idea of the exact worth of the company, as value of assets depreciate over a period of time. Thus when a company gets listed on a stock exchange the market value of the company can be determined. The market value of the company is got by multiplying the number of outstanding shares and the market price of that company’s share. This gives a fair estimate to any interested buyer who wants to go for acquisition. It also informs the investor, foreign institutional investors and banks who are involved with the company. The stock price on a stock exchange may differ.

For example RIL may be trading higher on BSE as compared to NSE. This price difference may be very small; yet investors who were trading RIL on BSE will make huge profits if the volumes are huge. Hence stock exchanges play a vital role in a company’s growth. There are many big companies who are listed on both the exchanges (BSE &NSE). When a company gets listed on a stock exchange, generally the company’s and promoters net worth increases substantially. If the company has good sales accompanied with good brand image the share value of the company increases over a period of time. The earnings of the company play a very crucial role in determining the share price of the company. We can back this by citing an example. Infosys, one of the largest software companies has seen its share price increasing from a face value of Rs 10 to Rs 3000 over a period of time. This has resulted in the company’s growth in terms of its net worth, huge profit and shareholder wealth maximization. Company’s growth and its share price rise are directly proportional in most cases. If the company does well it generally offers good dividends to keep its investors happy.

Profit sharing

Companies listed on the stock exchange share the profits with their shareholders in the form of dividends which are given either quarterly, semi-annually or annually. Stock exchange provides the benefit to the company as well as the trader; it is a win-win situation at the end of the day. The stock exchange helps the company to get more liquidity and the investor benefits from the profit he gets from the company in the form of dividends. Profit of company is sometimes also given to the investor in form of bonus shares. Sometimes the company also goes for a stock split which results in the increase in number of company’s shares, but decrease in share value. We should not undermine the role of stock broker without whom no transaction is even possible. He gets a small commission on every lot of shares. He also enjoys hefty commission if volumes are high. At the end we can say that all the players participating in the stock exchange are enjoying profits.

Creating investment opportunities for small investors

Stock markets are a good place for small retail investors who want to save money over a longer period of time. India has a large number of upper middle class income families. These families have high disposable income which they seek to make to turn into lucrative investments. Most of the men aged between 45-50 years who had participated in the market during the early 1990’s have reaped huge dividends and have seen their stock price more than double.

Today SEBI is creating awareness among the investors by organizing awareness campaigns throughout the country. It wants the small investors also to participate in this market. The participation of small investors is very small in today’s market.

Barometer of economy

Stock exchange is a key indicator for any investor whether domestic or foreign institution to make an investment. BSE & NSE are stock exchanges on which stocks are traded; but these stocks are measured in terms of an index. NIFTY 50 includes the top 50 companies on NSE and SENSEX includes the top 30 companies in terms of its net worth. There are various factors which contribute to the rise and fall of the stock market. Factors which include political, economical, environmental, global, company earnings and various others. A stock market on the rise indicates a very healthy economy. Countries look at India based on its stock market condition and then decide to invest.

Credit rating agencies such as S&P, CRISIL, MOODY’S are involved in grading countries according to GDP, stock market and other variables. GDP also plays a very important role in the volatility of the stock market. Today the SENSEX is very volatile as it is hovering around the 17500-19000 mark. Foreign Investors have remained cautious when entering into the Indian markets especially due to the recent political instability. However the recent FDI policies have seen the stock markets scaling high and many stocks outperforming and going to all time highs.

CONCLUSION

We have seen how a stock exchange can influence an entire economy. Thus we cannot undermine the role a stock exchange has to play. A stock exchange provides a good playing field for everybody to participate and mobilize funds in an effective way such as to see the welfare of the company, shareholders and the entire country as a whole. With SEBI as the apex body for the stock market, stock exchanges are highly regulated and are safe houses for investment.

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