What Is Stock Exchange?
Meaning of stock exchange
Stock exchanges are organized and regulated markets for various securities issued by the corporate sector and other institutions. The stock exchanges enable the free to purchase and sell securities. In the works of Pyle, "Security exchanges are a marketplace, where securities that have been listed, thereon may be bought and sold for either investment or speculation".
Securities Contract (Regulation) Act, 1956. "stock exchange means any body of individuals, whether incorporated or not, constituted for the purpose of assisting, regulation or controlling the business of buying and selling insecurities."
Every stock exchange has a specific location. In India, there are 24 stock exchanges at present. Out of these exchanges, the National Stock Exchange of India (NESI) and Over the Counter Exchange of India (OTCEI) are the India-level stock exchanges. From a business point of view Bombay Stock Exchange, also called Dalal Street, comes at number one, followed by Calcutta, popularly known as Lyons Exchange, and Delhi Stock Exchange.
The function of the Stock Exchange
Do the stock exchanges play an important role in the economic development of a country. ?The importance of stock exchanges will be clear from the functions they perform and are discussed as follows :
1. Providing Liquidity of Securities.
The stock exchanges provide a place where shares and stock are converted into cash. The exchanges provide a ready market where buyers and sellers are always available and those who are in need of hard cash can sell their holdings. Had this not been possible then many persons would have feared blocking their savings in securities. It is because of exchanges that many persons invest in securities and they can again convert them into cash.
2. Ensuring Safety of Transactions.
The dealings at stock exchanges are governed by well-defined rules and regulations of the Securities Contract (Regulation Act, 1956. There is no scope for manipulating transactions. Every contract is done according to the procedure laid down and there is no fear in the minds of contracting parties. Safety in dealings brings confidence in the minds of all concerned parties and helps in increasing various dealings.
3. Determines Price of SEcurities.
A stock exchange helps in determining the prices of securities through the forces of demand and supply. Under the existing online screen-based electronic trading system, computer screens display constant information on the prices of securities.
4. Contributes to Economic Growth.
A stock exchange is a market in which existing savings get channelized into the most productive avenues. This leads to capital formation and economic growth.
5. Spreads equity cult.
The stock exchanges play a vital role in ensuring wider share ownership by regulating new issues, better trading practices, and taking effective steps in educating the public about investments.
6. Provides Scope for Speculation.
A stock exchange provides scope for speculation in a restricted and controlled manner. A certain degree of healthy speculation is necessary for ensuring liquidity.
Trading Procedure at Stock Exchanges
The buying and selling at stock exchanges are not allowed to outsiders. They have to approach brokers who are members of the exchange and the dealings can only be done through them. The following procedure is followed for dealings at exchanges :
1. Selection of a Broker.
The first thing to be done is to select a broker through whom the purchase or sale is to be made. The intending investor or seller may approach his bank for this purpose. The banks have appointed their own brokers at exchanges and they contact for dealings on behalf of their customers. On a recommendation from the bank, the client's account is opened by the broker. The bank assures about the financial condition
2. Opening Demat Account.
The securities are held in electronic form by a depository. The opening of a Demat account is essential for stock exchange transactions. Demat (De material listed) account refers to an account that an Indian citizen must open with the depository participant (banks, stockbrokers) to trade in listed securities in electronic form. The securities are held in an electronic form by the depository and the depository interacts with the investors through depository participants. the depository participant maintains the account of securities and informs the account status to the investor from time to time.
3. Placing an Order.
After selecting the broker the client places an order for the purchase or sale of securities. The broker also guides the client about the type of securities to be purchased and the proper time for it. If a client is to sell the securities then the broker tells him about the favorable time for sale. The broker is told to purchase shares, their number, and the price to be paid. sometimes a definite price is given on which the purchase makes a purchase as far as possible to the nearest price offered by the client. The broker is given some choice for bargaining. The same type of choice is given to the broker for selling the securities.
4. Executing the Order.
The trading floor of the stock exchange is divided into different parts knowns as trading posts. Different posts deal in different types of securities. The authorized work of the broker goes to the concerned post and expresses his intention to buy and sell the securities. A deal is struck when the other party also agrees. The bargain is struck by an outcry mentioning the price and number of securities contracted by both the clerks. The bargain is noticed by both the parties in their notebooks. The slip giving brief details of the bargain is put in a box for making an announcement in the official price list for publicity.
5. Settlement.
The deal has to be settled and finalized on the T+2 day. It means if a trade has taken place on Monday, then it must be settled by Wednesday. All trading takes place from Monday to Friday between 9.55 AM to 3.30 PM, the delivery of shares is made in dematerialized form. All stock exchanges have their own clearinghouses, which assume all settlement risks.
