1.Write about stock exchange and it’s functions. 2.Write the advantage and limitations of stock exchange.
STOCK EXCHANGE:
Stock Exchange market is a vital component of a stock market. It facilitates the transaction between traders of financial instruments and targeted buyers.
They are organised and regulated financial market where securities are bought and sold at prices governed by the forces of demand and supplies. In another word and exchange is an institution or organisation or Association which host a market where stock bonds options and futures and commodities are traded.A stock exchange in India adheres to a set of rules and regulations directed by Securities and Exchange Board of India or SEBI. The said authoritative body functions to protect the interest of investors and aims to promote the stock market of India.
Stock exchange basically serve as:
Primary markets where corporations governments municipalities and other incorporated bodies can raise capital by channelling saving of the investor into productive ventures and
secondary markets were investors can sell their securities to other investors for cash, do reducing the risk of investment and maintaining liquidity in the system.
Stock Exchange market is a vital component of a stock market. It facilitates the transaction between traders of financial instruments and targeted buyers. A stock exchange in India adheres to a set of rules and regulations directed by Securities and Exchange Board of India or SEBI. The said authoritative body functions to protect the interest of investors and aims to promote the stock market of India.Mostly, a stock exchange in India works independently as no ‘market makers’ or ‘specialists’ are present in them.
The entire process of trading in stock exchange in India is order-driven and is conducted over an electronic limit order book.In such a set-up, orders are automatically matched with the help of the trading computer. It functions to match investors’ market orders with the most suitable limit orders.The major benefit of such an order-driven market is that it facilitates transparency in transactions by displaying all market orders publiclyBrokers play a vital role in the trading system of the stock exchange market, as all orders are placed through them.Both institutional investors and retail customers can avail the benefits associated with direct market access or DMA. By using the trading terminals provided by stock exchange market brokers, investors can place their orders directly into the trading system.Earlier the trade in exchanges were conducted on the floor which is called as trading floor of the exchange itself by shouting Orders and instructions which is called as open outcry system now at exchanges trades are conducted over telephone or online. almost all exchange are auction exchanges where buyers enter competitive bids and seller enter competitive order through a trading day.
☆ functions of stock exchange:
Stock exchange serves as an economic barometer of a country that perform several economic functions and render in valuable services to the investor’s companies and to the economy as a whole the play an important role in the economic development of a nation.
Major functions are as follows:
Marketability of securities:
Stock exchange provides a market for the purchase and sale of securities. As a result any person holding there securities can get back his or her money which they have in invested in the the securities in the form of of shares,debentures, government Bond, etc. By selling them through the brokers of a stock exchange at the market price. Similarly, a person willing to make investment in securities or conduct specialisation in securities can do so with the help of these stock market.
Liquidity to investment:-
People readily invest in the industrial security is as the money block in these securities can be released by selling them in stock exchange. In the absence of these stock exchanges form of the public would not have freely invested in the industrial and government securities. As a result ,the industry and government would have staff for the capital for stop does stock exchanges provide liquidity for the industrial securities and help the industry to for the development of a country.
Supply of long term funds-
money that has been borrowed for a period of ten years: Venture capitalists provide equity and other types of long term funds to unlisted companies. The securities traded in stock market are negotiable. They can be transferred with minimum formalities from one person to another. As a result of this facility people readily invest in the industrial securities and companies receive a good response for their public issue of shares and debentures whenever they need find. Thus, they are as short a long-term availability of funds due to existence of stock markets.
Evaluation of securities-
The process of determining how much a security is worth. Security valuation is highly subjective, but it is easiest when one is considering the value of tangible assets, level of debt, and other quantifiable data of the company issuing a security is called evaluation of security. Stock exchange keeps a record and makes a public declaration of prices at which securities are traded. On the basis of these prices for the securities quoted in the market, the investors and speculators can evaluate the values of securities held by them.
Motivation for the companies for improvement in the performance–
Motivation is about the ways a business can encourage staff to give their best. Motivated staff care about the success of the business and work better.
The performance of a company is reflected through the prices quoted for the securities in the stock markets. With the improvement in the performance of a company, the prices of shares in the market increase, enhancing the Goodwill of the company.thus, stock market indirectly motivate the companies to improve their financial performance through continual increase in productivity and profitability.
Assistance of capital formation–
Stock market insurance liquidity industrial securities, it also ensures the appreciation of funds investment in the securities with the improvement in the performance of companies and increase in the demand for their companies securities. Capital formation is a term used to describe the net capital accumulation during an accounting period for a particular country. The term refers to additions of capital goods, such as equipment, tools, transportation assets, and electricity. Countries need capital goods to replace the older ones that are used to produce goods and services.thus, Dev motivate the public to invest their savings in the capital of the company’s. These savings are channelized in the productive activities of the company’s, resulting in the capital formation which is essential for the economic development of a nation.
Protection of investors-
Investor protection means that up to a certain limit, you receive your money back if the broker goes into bankruptcy or commits fraud. It is an important factor to consider when you open an account with an online broker. When you open a trading account at a brokerage, you usually get investor protection. Stock market conduct the trade insecurities subject to certain rules and regulations. These rules prevent over trading for a legitimate speculation and charging of Texas Commission on trading by the brokers in order to protect the interest of common investors.thus, stock exchanges safeguard The Innocent investors from the Mal practices of clever brokers in security. This strengthens the investor confidence and promote large investment.
Encouragement of savings-
Stock exchanges provide an attractive Avenue for investor visa in they can invest their small savings in industrial securities and obtain a regular return on investment as well as capital appreciation. Thus,they encourages savings habits among the public.
Listing of securities-
Listing of Securities. Listing means the admission of securities of a company to trading on a stock exchange. Listing is not compulsory under the Companies Act. It becomes necessary when a public limited company desires to issue shares or debentures to the public. Stock exchanges do the listing of securities of various companies. Only listed securities are traded on stock exchanges. Listening of a security means permission to the security to court officially on trading floor of the exchange. Share or debentures of a particular company can be listed and traded at stock exchange only if the company fulfills certain standard norms fixed by the exchange.
Maintaining business information–
Business information comes in general surveys, data, articles, books, references, search-engines, and internal records that a business can use to guide its planning, operations, and the evaluation of its activities. Such information also comes from friends, customers, associates, and vendors. Companies whose securities are listed on stock exchange are required to furnish the financial statements and other reports and settlements. The stock exchange maintains a detailed record of the various companies whose securities are traded on its floor.
Raising capital for businesses-
Raising capital essentially means getting the money you need to grow your business from investors. Raising capital is another way of talking about financing your business. You can raise capital through investors, or you can take out debts, like loans or credit cards, to finance your business venture. stock exchanges help joint stock companies to capitalise by selling shares to the investing public.
☆ Advantages of listing securities in stock exchange:
Facilities marketing of securities:
If a company does the listing of its share on recognised stock exchanges, its shareholders will be able to release their investment in the shares at market price whenever they want by selling these shares of stock exchanges .
An investor who wants to purchase the shares of that company may buy those shares at market price in those stocks exchanges.constant marketing facilities are availed to the securities that are listed on the exchange of the stock.
Assures finance to the companies:
Whenever a company offer its shares to the public, it receives proper response from the investor’s only if such shares are listed on recognised stock exchanges. this is the reason for that listing enables the investor to release his money in the shares by selling those on stock exchange and listing enabled the companies to raise the necessary finance by the issue of the the its security to the public.
Ensures liquidity:
The price of the listed securities are quoted daily in the share markets. the listed of securities can be readily converted into the cash at the quoted price. the listing ensures liquidity of securities.
. Enables the investors to borrow the funds:
Banks and other financial institution accepted the listed securities as Collateral securities against their loans and the advances because these securities have a ready market.and though the people holding the list security can raise their loan against such securities without facing any difficulty.
Protect investors:
The companies that have already listed their security on the have to follow the rules and regulations of the stock market and the security and exchange Board of India they have to maintain that transparency in their working and have to disclose their financial information and policies. All these rules and regulations and transparency aim at protection of interest of small investor should not be deceived or put to loss.
Offers wide publicity:
Names of the companies whose securities are listed on the stock exchange are mentioned regularly in stock market reports, TV,news paper ,radios and many more .thus, listed securities offer wide advertising and publicity to the companies concerned.
The companies have the convenience to decide upon the size price and timing of the issues.
The companies whose securities have been listed on stock exchange they enjoy a better goodwill and credit standing than other companies because they are support to be financially sound .as a result of enhanced goodwill and higher demand, the value of their securities increases and their bargaining power in collective ventures, mergers, is enhanced.
The volume of activity at the stock exchanges and the movement of the share prices reflect the changing economic health.
Since the government securities are also trade and the stock exchanges the government borrowing is highly facilitated. the bonds issued by the government, electricity boards, municipal corporation and public sector understakings are found to be on a offer quite frequently and generally successful.
The investors enjoy the ready availability of facility and convenience of buying and selling the securities at will and at an opportunity time .availability of regular information on price of securities trade at the stock exchange help them and deciding on the timing of their purchase and sale. it becomes easier for them to raise these loans from banks against their Holdings in securities trade at the stock exchange because banks prefers for them at the Collateral on account of their liquidity and convenient valuation.
The availability of lucrative avenues of the investment and the liquidity there of induces people to save and invest in the long term securities. this leads to the increased capital formation in the country.
☆ Limitations of stock exchanges:
The common evils associated with stock exchange operation is the excessive speculations implies buying or selling securities to take the advantage of price differential at different times. the speculators generally do not take or give delivery and pay or receive full payment. they settle their transactions just as by paying the differences and their prices. Normally, speculation is considered as a healthy practice and it is necessary for successful operation of the stock exchange activity.but when it becomes excessive ,it leads to the wide fluctuations in the price and various malpractices by the vested interest .in the process genuine investors suffer and are driven out of the markets.
The price security may be fluctuate due to the unpredictable political social and economic factors as well as on account of rumours spread by the interested parties this makes it more difficult to assess the movement of prices in future and build appropriate Strategies for investment and securities however these days good amount of vigilance in exercised by stock exchange authorities and SEBI to control activity and the stock exchange and ensure their healthy functioning.
■ PRODUCTS DEALT IN THE SECONDARY MARKETS :
Following are the main financial products/instruments dealt in the Secondary market which may be divided broadly into Shares and Bonds: Shares:
Rights Issue/ rights shre:
The issue of new securities to existing shareholders at a ratio to those already held, at a price. For e.g. a 2:3 rights issue at Rs. 125, would entitle a shareholder to receive 2
shares for every 3 shares held at a price of Rs. 125 per share.
.Bonus Shares:
Shares issued by the companies to their shareholders free of cost based on the number of shares the shareholder owns. The capitalisation of accumulated reserves from the profits earned in the earlier years.
Preference shares:
Owners of these kind of shares are entitled to a fixed dividend or dividend calculated at a fixed rate to be paid regularly before dividend can be paid in respect of equity share. They also enjoy priority over the equity shareholders in payment of surplus. But in the event of liquidation, their claims rank below the claims of the company’s creditors, bondholders or debenture holders.
Cumulative Preference Shares:
A type of preference shares on which dividend accumulates if remained unpaid. All arrears of preference dividend have to be paid out before paying dividend on equity shares.
Cumulative Convertible Preference Shares:
A type of preference shares where the dividend payable on the same accumulates, if not paid. After a specified date, these shares will be converted into equity capital of the company.
Participating preference share :
the right of certain preference shareholders to participate in the profits after a specified fixed dividend and contracted for is paid. participants right is linked with the quantum of dividend paid on the equity shares over and above a particular specified level.
Security receipts:
Security receipts means a receipt or other security, issued by a securitization company or reconstruction company to any qualified institutional buyer pursuant to a scheme ,evidencing the purchase or acquisition by the holders thereof ,of an undivided right, title or interest in the financial asset involved in securitization.
Government securities:
These are sovereign coupon bearing instruments which are approved by the Reserve bank of India on behalf of the Government of India,in lieu of the central government market Borrowing programme.these securities have a fixed coupon that is paid on specific dates on basis of half yearly basis. These securities are available in a wide range of maturity dates,from short dated to long dated .
Debentures:
Bonds issued by the company bearing fixed rate of interest usually payable half yearly on a specific dates and principal amount repayable on particular date on redemption of the debentures .debentures are normally secured or charged against the Asset of the company in the favour of debenture holders.
10. Bond: a negotiable certificate evidencing indebtness .it is normally unsecured . that a debt security is generally issued by the company, municipality or government agency , or government agency. A Bond investor lends money to the issuer , and in exchange ,the issuer promises to repay the loan amount on a specific maturity date. the issuer usually pays the bondholder periodic interest payments over the life of the loan.
The various types of bonds are as follows:
a. Zero- coupon bond:-
Bond issied at a discount and repaid at a face value. A zero-coupon bond is a debt security that does not pay interest but instead trades at a deep discount, rendering a profit at maturity, when the bond is redeemed for its full face value. … Because they offer the entire payment at maturity, zero-coupon bonds tend to fluctuate in price, much moreso than coupon bonds . No periodic interest is paid. The difference between the issues price and redemptions price presents The returned to the holder will stop the buyer of this bond receives only one payment, at the maturity of the bond.
b. Convertible Bond -A convertible bond is a fixed-income corporate debt security that yields interest payments, but can be converted into a predetermined number of common stock or equity shares. The conversion from the bond to stock can be done at certain times during the bond’s life and is usually at the discretion of the bondholder. Karbonn giving the interested the option to convert the bond into equity at a fixed conversion price.
Commercial paper-
A short term promise to repay of fixed amount that is placed on the market either directly or through specializedintermediary.
Commercial paper, also called CP, is a short-term debt instrument issued by companies to raise funds generally for a time period up to one year.
It is usually issued by companies with high credit standing in the form of promissory note redeemable at par to holder on maturity therefore, it doesn’t require any e guarantee. Commercial paper II is a money market instrument issued normally for tenure of 90 days.
Treasury bills-
The treasury bills are the short- term barrier discount security.A Treasury Bill is a short-term debt obligation backed by the U.S. Treasury Department with a maturity of one year or less. Treasury bills are usuall
