4.1 Brief History of Stock Exchange, Study of Functions of BSE & NSE
Stock markets are fascinating
entities and not for the least because they help investors make money! They are
interesting institutions in themselves and those in India have a rich history.
The Securities Contracts
(Regulation) Act of 1956defines a stock exchange as “anybody of individuals,
whether incorporated or not, constituted before corporatization and
demutualization” or “a body corporate incorporated under the Companies Act,
1956 whether under a scheme of corporatization and demutualization or
otherwise,” for the purpose of assisting, regulating or controlling the
business of buying, selling or dealing in securities.
Just to clarify,
“corporatization” means the succession of a recognized stock exchange, which
was a body of individuals or a society, by another stock exchange, which is an
incorporated company. Meanwhile, “demutualization” means the segregation of
ownership and management from the trading rights of the members of a recognized
stock exchange in accordance with a scheme approved by the Securities and
Exchange Board of India (SEBI).
A deep history
Security trading in India goes
back to the 18th century when the East India Company began trading in loan
securities. Corporate shares started being traded in the 1830s in Bombay (now
Mumbai) with the stock of Bank and Cotton presses. The simple and informal
beginnings of stock exchanges in India take one back to the 1850s when 22
stockbrokers began trading opposite the Town Hall of Bombay under a banyan
tree. The tree still stands in the area which is now known as Horniman Circle.
The venue then shifted to banyan
trees at the Meadows Street junction, which is now known as Mahatma Gandhi
Road, a decade later. The shift continued taking place as the number of brokers
increased, finally settling in 1874 at what is known as Dalal Street. This as
yet informal group known as the Native Share and Stockbrokers Association
organized themselves as the Bombay Stock Exchange (BSE) in 1875. The BSE is the
oldest stock exchange in Asia and was the first to be granted permanent
recognition under the Securities Contract Regulation Act, 1956.
SENSEX (BSE)
Meaning and concept
The Bombay Stock Exchange's Sensitive Index, also called Sensex or BSE Sensex, is
one of the leading stock market benchmark indices in India. It tracks the
movement of stock prices on the exchange and functions as an indicator of
market sentiments.
Launched by BSE in 1986, Sensex consists
of 30 components (stocks) that represent, broadly, the composition of the
entire market. Each of the scrips is assigned a weightage on the index that is
linked to its market capitalization. It measures a particular stock's ability
to influence movements in the index. The base year of the Sensex is 1978-79
with the base index value taken as 100 points.
While the number of components has remained
the same since its inception, the composition of the Sensex changes
periodically as scrips are inducted or removed depending on their market
capitalization, frequency and volume of trading and volatility among other
parameters.
For a long time the BSE Sensex was the
only benchmark index in India for the stock markets until the National Stock Exchange was launched in the early nineties. Its S&P Nifty Index is a much broader index, but the Sensex is still followed
as a barometer of market sentiment in India.
Process of Calculation of Sensex:
1) First the market capitalization is taken into
account.
2) This is done by multiplying all the Shares issued
by the Company with the Price of its Stock
3) BSE determines a Free-float Factor that is the
Multiple of the Market Capitalization of the company
4) This helps in determining the Free-float Market
Capitalization based on the details submitted by the Company.
5) Ratio and Proportion are used based on the Base
Index of 100 This helps to determine the Sensex.
NIFTY (NSE)
Meaning and Concept
The term Nifty is derived from the
combination National and Fifty as Nifty consists of 50 actively traded stocks.
Nifty is primarily an equity benchmark index which was introduced on April 21,
1996 by National Stock Exchange. Nifty is an abbreviation of National Stock
Exchange Fifty, it is the broad index of the National Stock Exchange (NSE). NSE is
a leading stock exchange in India.
On June 12, 2000, NSE commenced trading
in derivatives with index future. The futures contracts are based on Nifty 50.
Later on, the exchange introduced trading in index options on June 4, 2001.
The term Nifty is derived from the
combination National and Fifty as Nifty consists of 50 actively traded stocks.
Nifty is primarily an equity benchmark index which was introduced in April 21,
1996 by National Stock Exchange. Nifty is an abbreviation of National Stock
Exchange Fifty, it is the broad index of the National Stock Exchange (NSE). NSE is
a leading stock exchange in India.
On June 12, 2000, NSE commenced trading
in derivatives with index future. The futures contracts are based on Nifty 50.
Later on, the exchange introduced trading in index options on June 4, 2001.
Process of Calculation of NIFTY
Nifty is also calculated through the Free-float Market
Capitalization Weighted Method. Just like Sensex, Nifty also follow
Mathematical Formula to know the Market Capitalization,
1) It multiplies the Equity Capital with the price to
derive the Market Capitalization.
2) In order to determine the Free-float Market
Capitalization Equity capital is multiplied by the Price which is further
multiplied by Investible Weight Factor (IWF), It is the factor for determining
the number of shares available for trading freely in the market.
3)
The index is determined on a Daily Basis by taking into consideration
the Current Market Value divided by Base Market Capital and then
multiplied by the Base Index Value of 1000,
FUNCTIONS OF BSE & NSE
The
Share Market or Stock Exchange performs the following Economic Functions
1. It provides a ready market for buying and selling
of securities,
2 It performs an 'act of magic' as il enables
long-term investments to be financed by funds provided by individuals who are
otherwise interested in short-term or medium-term investment,
3. It directs the flow of capital in the most
profitable channels,
4. It induces corporate enterprises to raise their
standard of performance,
5. It offers an easily understood evaluation of the
financial condition and prospects of listed firms
6. It facilitates speculation,
7. It promotes the habit of saving and investment
among the general public and thereby helps capital formation, and
8. It promotes industrial growth and economic
development of the country by encouraging industrial investment rather than
hoarding or investing in gold.
4.2 Stock Exchange and its Importance
MEANING OF STOCK EXCHANGE
A
Stock Exchange is a market where the Securities, i.e. Shares,
Debentures, and Government Securities, are bought and sold. The
Securities Contracts
(Regulation) Act, I1956, defines a Stock Exchange as "an association,
organisation, 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 Share Market exists because
certain
owners of Securities wish to sell them, others wish to buy them, and the
titles
to the Securities are transferable. A Securities Exchange does not
itself
engage in the purchase or sale of securities, Rather, its function is to
make
such trading as smooth and efficient as possible.
Role of stock exchanges
Raising
capital for businesses
Besides the borrowing capacity
provided to an individual or firm by the banking system, in the form of credit or a loan, a stock exchange provides companies with the facility to raise capital for expansion through selling shares to the investing public.
Corporate
partners
Another alternative source of cash for a private company is a corporate partner, usually an established multinational
company, which provides capital for the smaller company in return for marketing
rights, patent rights, or equity. Corporate partnerships have been used
successfully in a large number of cases.
Mobilizing
savings for investment
When people draw their savings and
invest in shares (through an initial public
offering or the seasoned equity
offering of an already
listed company), it usually leads to rational allocation of resources because funds, which could have
been consumed, or kept in idle deposits with banks, are mobilized and redirected to help
companies' management boards finance their organizations. This may promote
business activity with benefits for several economic sectors such as
agriculture, commerce and industry, resulting in stronger economic growth and
higher productivity levels of firms.
Facilitating
acquisitions
Companies view acquisitions as an
opportunity to expand product lines, increase distribution channels, hedge against volatility,
increase their market share, or acquire other necessary business assets. A takeover bid or mergers and
acquisitions through the stock market is one of the simplest and most common ways for a company
to grow by acquisition or fusion.
Profit
sharing
Both casual and professional stock investors, as large as institutional
investors or as small as an
ordinary middle-class family, through dividends and stock price increases that may result in capital gains, share in the wealth of profitable businesses. Unprofitable and
troubled businesses may result in capital losses for shareholders.
Corporate
governance
By having a wide and varied scope of
owners, companies generally tend to improve management standards and efficiency to satisfy the demands of these shareholders and the more
stringent rules for public corporations imposed by public stock exchanges and
the government. This improvement can be attributed in some cases to the price
mechanism exerted through shares of stock, wherein the price of the stock falls
when management is considered poor (making the firm vulnerable to a takeover by
new management) or rises when management is doing well (making the firm less
vulnerable to a takeover).
Creating
investment opportunities for small investors
As opposed to other businesses that
require huge capital outlay, investing in shares is open to both the large and
small stock investors as minimum investment amounts are minimal. Therefore, the
stock exchange provides the opportunity for small investors to own shares of
the same companies as large investors.
Government
capital-raising for development projects
Governments at various levels may decide
to borrow money to finance infrastructure projects such as sewage and water
treatment works or housing estates by selling another category of securities known as bonds. These bonds can be raised through the stock exchange whereby
members of the public buy them, thus loaning money to the government. The
issuance of such bonds can obviate, in the short term, direct taxation of
citizens to finance development—though by securing such bonds with the full
faith and credit of the government instead of with collateral, the government
must eventually tax citizens or otherwise raise additional funds to make any
regular coupon payments and refund the principal when the bonds mature.
Barometer of
the economy
At the stock exchange, share prices rise
and fall depending, largely, on economic forces. Share prices tend to rise or
remain stable when companies and the economy in general show signs of stability
and growth. A recession, depression, or financial crisis could eventually lead to a stock market crash. Therefore, the movement of share prices and in general of the stock indexes can be an indicator of the general trend in the economy.
4.3 Primary Market & Secondary Market:
Components of Primary Market
Stock exchange refers to the market for shares and
bonds of the existing companies as well as those of new companies. This market
is further divided into New Issue Market (NIM) and old issue market. The New
issue market is also called the primary market. Likewise, the old issue market is
also called the secondary market.
1) Primary Market: The Primary Market is concerned
with the flotation of new issues of Shares or Bonds. The firms floating new
issues to raise funds may be new companies or existing companies planning
expansion. The Stock Issuing Company Approaches the Institutional underwriters
like LIC, UTI, ICICI and IDBI, to ensure the marketability o an issue. The
underwriters like LICUTI and Commercial Banks purchase securities from the new
issue market to hold these in their own asset portfolio. The Equity Capital may
be raised through Initial Public Offer (IPO). IPO is the first issue of share
by a corporate company to the general public to raise capital for expansion of
its business. IPO is followed by a listing of its shares in the Stock Market. The
Issue of IPO by the Indian Companies and the Price of Share that is fixed is regulated
by SEBI. IPOS may be issued through the "Fixed Price Method" or
through the book-building procedure.
2) Secondary Market: The Secondary Market deals in
existing securities. This Market Provides both Liquidity and Marketability to
such securities. It implies that it is a market where security can be bought
or Sold at Small Transaction Cost. Although the Secondary Market deals with the
purchase and sale of Old Securities, the firms Issuing new securities get
themselves registered on s Stock Exchange by applying for listing of shares.
Listing offers the Investor a Market for the Sale of His Stock. Listed securities
are those securities which appear on the approved list of Stock Exchange. Only
listed securities are traded on the floor of the Stock Exchange. It is to be
noted that an Organised Stock Exchange is an ‘auction’ type of market. Where the
Prices of Traded securities are settled by open bids and offers on the floor of
the exchange.
4.4 D-Mat Account: Definition and Procedure
Demat Account is an account that is used
to hold shares and securities in electronic format. The full form of Demat
account is a dematerialised account. The purpose of opening a Demat account is to hold shares that have been bought or dematerialised
(converted from physical to electronic shares), thus making share trading easy
for the users during online trading.
In India, Free
Demat account service is
provided by depositories such as NSDL and CDSL through intermediaries /
Depository Participant / Stock Broker such as Angel Broking. The charges of
Demat account vary as per the volume held in the account, type subscribed, and
the terms and conditions laid by the depository and the stockbroker.
What is Demat Account?
Demat Account or dematerialised account
provides the facility of holding shares and securities in electronic format. During
online trading, shares are bought and held in a Demat account, thus
facilitating easy trade for the users. A Demat
Account holds all the investments an individual makes in
shares, government securities, exchange-traded funds, bonds and mutual funds in
one place.
What is
dematerialisation?
Dematerialisation is the process of
converting the physical share certificates into electronic form, which is a lot
easier to maintain and is accessible from anywhere throughout the world. An
investor who wants to trade online needs to open a Demat with a Depository
Participant (DP). The purpose of dematerialisation is to eliminate the need for the investor to hold physical
share certificates and facilitating a seamless tracking and monitoring of
holdings.
How
to open a D-mat Account:
Decide on a Depository
Participant (DP), which is any authorized bank, financial institution or
broker, with who you want to open a Demat Account with. The choice of a DP
should ideally depend on the brokerage charges, annual charges &leverage
provided.
Submit a duly filled account
opening form and KYC form. Along with this, you will need to attach copies of –
- PAN Card
- Residence Proof
- ID Proof
- Passport-sized photographs
Do carry original copies of
all for verification purposes. You will also need to give a cancelled cheque
for dividend bank details.
You will then need to sign an
agreement that will mention all the rules, regulations and rights associated
with holding a D-mat Account. Read them carefully and do not hesitate to clear
all your doubts. When this is submitted to the DP, it will be signed by an
authorized person and a copy of the same will be given to you.
When the account is opened,
you will receive a unique Client ID from the DP. This, along with other
details, will help you get access to your D-mat Account online.
You will also be given
instruction slips by the DP, which will be of use for depository services like
transfer, purchase, etc.
Note that a D-mat Account does
not require any ‘minimum balance’ of shares or financial securities to be held
in it. Also, you can hold more than one Demat Accounts linked to a single PAN.
However, not with the same DP.
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