STOCK EXCHANGE

WHAT IS STOCK EXCHANGE

Stock exchange is that place where trading of shares is done in terms of sale and purchase.

INTRODUCTION
There are 23 stock exchanges in the India. Bombay Stock Exchange is the largest, with over 6,000 stocks listed. The BSE accounts for over two thirds of the total trading volume in the country. Established in 1875, this exchange is also the oldest in Asia. Among the twenty-two Stock Exchanges recognised by the Government of India under the Securities Contracts (Regulation) Act, 1956, it was the first one to be recognised and it is the only one that had the privilege of getting permanent recognition.

Name of Indian stock exchange:

1.Bombay stock exchange 2.national stock exchange(Mumbai) 3.Banglore stock exchange 4.Utter pradesh stock exchange(kanpur) 5.Magadh stock exchange(Patna) 6.Ahmedabad stock exchange 7.vadodara stock exchange(Baroda) 8.Bhubaneswar stock exchange 9.Calcutta stock exchange(kolkata) 10.madras stock exchange

Cont.
11.Cochin stock exchange 12.coimbatore stock exchange 13.Guwahati stock exchange 14.Hydrabad stock exchange 15.Madhya pradesh stock exchange(indore) 16.Jaipur stock exchange 17.Ludhina stock exchange 18.Mangalore stock exchange 19.Pune stock exchange 20.saurashtrakutch stock exchange 21. OTCEI 22. Delhi stock exchange.

Stock Markets - Primary & Secondary

Role of Primary Markets

Serve to reduces the adverse selection process in raising capital Reduces search costs intermediaries (underwriters) find investors
Large institutions --Wealthy clients Active household investors

Role of Secondary Markets

Liquidity: Investors trade time and risk, buying and selling financial instruments prior to maturity Search costs: Central trading locations reduce search costs Information production
Continuous trading assets are priced daily Low cost - look for stock price online

Types of secondary markets

Exchanges: (NYSE, NSE, Regional, CBOE, London Gold Exchange)
A central location (trading floor) where the exchange of financial securities takes place Central agents match buyers and sellers (one point of contact)

Types of secondary markets

Over-the-counter (OTC): eg. Nasdaq
A geographically dispersed trading forum where traders are linked through telecommunications (computer) systems Infinite number of communications pathways (no single point of contact)

Secondary Market structures

Call Market (Walrasian auction): Orders are batched together for simultaneous execution
Auctioneer determines the market clearing price prior to trading in the following manner: Auctioneer proposes a price Representatives (buyers and sellers) privately indicate whether or not they are a buyer or seller at that price. If equilibrium (net buys = net sells) is not reached, then auctioneer proposes adjusted price. Process continues until auctioneer finds the market clearing price. Once this price is determined, then all trades occur simultaneously Free rider problem: All private information is revealed prior to trading since trading does not occur until a market clearing price is revealed. The price moves to equilibrium prior to the first trade, so even uninformed investors benefit (free-ride) off the private information of informed investors. London Gold Bullion market is a call market prices set twice daily.

Continuous (Auction) Market:

Most common market in the electronic age. Prices are determined continuously throughout the trading hours as buyers submit their buy and sell orders.

Secondary Market Participants

Investors: buyers and sellers of securities (households and financial institutions) Brokers: Earn commissions by serving as an agent on behalf of the buyer or seller (real estate agent, mortgage broker, stock broker)

Dealers: Take inventory on their own account in a traded asset to facilitate trading (car dealer, investment or commercial bank)

Broker-dealers: act as agents in addition to holding inventory and trading on their own account

Market-Makers: A dealer that is tasked with keeping the market running smoothly, and may be a privileged/regulatory activity (NYSE specialist)

Stock Market Participants

Market Makers: Dealer-brokers who are required to trade to keep market moving smoothly (NASD member firms and NYSE specialists). Market makers profit through two avenue streams:

Order matching earns commission by acting as an agent to the investor Taking a position earns the bid-ask spread by acting as a dealer (principal/owner) In an idealized market, Market makers would need only match orders and charge a small fee. However, if trade imbalances occur (more buys than sells or vice-versa), then the market-maker is required to take a position to smooth trading

NSE
The National Stock Exchange (NSE), located in Bombay, is India's first debt market. It was set up in 1993 to encourage stock exchange reform through system modernization and competition. It opened for trading in mid1994. It was recently accorded recognition as a stock exchange by the Department of Company Affairs. The instruments traded are, treasury bills, government security and bonds issued by public sector companies

CONT.
The Organisation: The National Stock Exchange of India Limited has genesis in the report of the High Powered Study Group on Establishment of New Stock Exchanges, which recommended promotion of a National Stock Exchange by financial institutions (FIs) to provide access to investors from all across the country on an equal footing.

CONT
Based on the recommendations, NSE was promoted by leading Financial Institutions at the behest of the Government of India and was incorporated in November 1992 as a tax-paying company unlike other stock exchanges in the country

CONT
NSEGroup: 1. India Index Services & Products Ltd. (IISL) 2. National Securities Clearing Corporation Ltd. (NSCCL) 3. NSE.IT Ltd. 4. National Securities Depository Ltd. (NSDL) 5. DotEx International Limited

New York Stock Exchange (NYSE)

Is the biggest and most prestigious national exchange with 2,800 listed companies and a market value of $13.3 Trillion (13/30/05). The NYSE has 1366 exchange members (seats) which themselves trade at prices upwards of 2 million dollars. These firms collectively own the exchange; however, they do not run the exchange Seat holders are allowed to buy and sell securities on the exchange floor without paying commissions

New York Stock Exchange (NYSE)

NYSE Characteristics:
Average trading volume is about 1 billion shares per day About half of the NYSE members are commission brokers, while the other half is specialists/market makers The market opens each day as a call market (specialist sets market clearing price), and then operates as a continuous auction throughout the rest of the trading day Each firm traded on the exchange is assigned only one specialist, but a specialist can be assigned more than one security/firm

 Each specialist has a private limit order book in which they have the demand schedule for all buyers and sellers (price & quantity). Their first obligation is to match orders, and only if necessary, trade on their own inventory 80% of all trades done by a specialist or order matches, 20% are trades on their own inventory. If trade imbalances get too large, beyond the capacity of the market maker to facilitate smooth trading, then trade suspension may occur. This occurs more often than you think, particularly around merger announcement or large private information events. If the Specialist observes unusual activity, then trading can be suspended.

NYSE Delisting
NYSE delisting can occur if:
There are fewer than 400 total security holders There are less than 1,200 total holders and average month-end volume is 100,000 shares Fewer than 600,000 shares in public hands Market cap less than $8 Million Market cap or tangible assets less than $12 Million and NI less than 600,000

Over the Counter (OTC) markets

Over-the-counter stock markets: NASDAQ (National Association of Securities Dealers Automated Quotations system) was established in 1971 as a subsidiary of the NASD (National Association of Securities Dealers) Trades over 3,800 stocks on a virtual trading floor a network of computer systems and over 500 market makers. There are listing requirement for NASDAQ firms, but even so, this is referred to as the unlisted firm market, because initially the NASDAQ served those firms that could not list on an exchange.

CONT.
Market characteristics
Negotiated system with Multiple Market Makers as many as 20 market makers may list quotes on Microsoft (MSFT). Although smaller aggregate market cap, share volume on the Nasdaq larger than NYSE, with almost 500 billions shares traded annually. There are listing requirement for NASDAQ firms, but even so, this is referred to as the unlisted firm market, because initially the NASDAQ served those firms that could not list on an exchange. Historically, firms would switch to the NYSE from NASDAQ when they were sufficiently mature, but since the late 1980s, many firms remained, particularly in the high-tech sectors (Microsoft, Oracle, Cisco etc.). Now the NASDAQ is on par with the NYSE..

Electronic Communication Networks (ECNs)

ECNs electronic communications exchanges (Island, Instinet, Archipelago, MarketXT etc.) are a relatively recent financial innovation
ECNs were initially formed as a private network to execute trades, but have since been popularized with competitive pricing NASDAQ was opened to ECNs in late 1990s which spurred their growth. ECN orders are transmitted to NASDAQ and are displayed along side market makers

CONT..
ECNs are not market makers, do not act as a dealer holding inventory, but simply broker order matching. Investors can trade directly with one another through an ECN, by passing the regular market structure Execute after hour trades (past 4PM Eastern time) greater than 70 million shares a day

Institutional Trading
Block Trades: Trades greater than 10,000 shares and a Market Value of $200,000 Program Trades: When a buyer wants to purchase a number of different stocks at the same time Upstairs market: Trading desks at major securities firms are linked electronically to make trades among themselves, off of the exchange floor, and not through a market maker or specialist.

SPECULATION :
Definition : it involves the buying, holding, selling, shortterm selling of stocks, bonds, commodities, currencies, collectibles or any valuable financial instrument to profit from fluctuations in its price as opposed to buying it for use or for income via method like dividends or interest.

Kinds of speculation
Bull Market (Tejiwala): In case of that they purchase the shares at current prices to sell at a higher price in the near future and makes a profit if his expectations come true.he is also called a long buyer. Bear Market (Mandiwala) : He sells security in the hope that he will be able to buy them back at lesser price.It is also called short selling.

Cont
Lame duck : When a bear has made contracts to sell securities,find it difficult to meet his commitment due to non-availability of security,,they always struggling.. Stag : He is that type of speculator who applies for a large number of a shares in a new issue with the intention of selling them at a premium.He is bullish and very cautious.

BENEFITS OF STOCK EXCHANGE

FROM THE POINT OF VIEW OF COMMUNITY: 1.It assist the economis development by providing a body of interested investors. 2.it uploads the position of superior enterprises and assist them in raising further funds. 3.It encourages capital formation 4.Government can undertake projects of national importance and social value raising funds through the sale of its securities on the stock exchange. 5.It is the stock exchanges that central bank of a country can control credit by undertaking open market operations (purchase and sale of securities)

FROM THE COMPANY POINT OF VIEW 1.A company whose shares quoted on stock exchange they enjoy better reputation and credit. 2.The market for the shares of such a company is naturally widened. 3.The market price of securities is likely to be higher in relation to its earnings,dividends and property values.This raises the bargaining power of the company in the event of a takeover,merger or amalgamation.

FROM THE INVESTORS POINT OF VIEW

1.Liquidity of the investment is increased 2.The securities dealt on a stock exchange are good collateral security for loans. 3.The stock exchange safeguards interests of investors through strict enforcement of rules and regulations. 4.The present net worth of investments can be easily known by the daily quotations. 5.His risk is considerably less when he holds or purchases listed securities.

ROLE PLAYER

EXTERNAL:--- 1.SHAREHOLDER 2.DEBENTURE HOLDER

SHAREHOLDER
Shareholders are divided into two parts 1.Preference shareholder: Preference shareholder are those which have preferential right to the payment of dividend during the life time of the company,and a preferential right to the return of the capital when the company is wound up.

CHARACTERISTICS OF PREF.SHAREHOLDER
1.The dividend on them is fixed by the articles of the company. 2.They get their fixed rate of dividend before any dividend is distributed among the other class of shareholders. 3.At the time of winding up of the company, the preference shareholder must be paid back their capital before anything is paid to the ordinary shareholders.

KINDS OF PREF.SHAREHOLDER 1.Comulative shareholder: These shares are entitled to fixed dividends whether there are profits or loss. If profits are not sufficient to pay in a particular year then that will pay on next year. 2.Non comulative pref.share: These shares cannot claim arrears of dividends of any year (if not paid due to insufficiency of pfofits ) out of profits of subsequent year.

Cont.
3.Participating pref. Shares: These shares receives a fixed rate of dividend in priority to ordinary shares and further, the right to participate in balance of profits in an agreed proportion together with ordinary shares. 4.Redeemable pref. shares: These are shares which can be purchased back by the company. The company reserves its rights to call back or purchased these shares at any time .

EQUITY SHARES All shares which are not preference shares are equity shares. These shares do not have a fixed rate of dividend, they are always irredeemable and their holders have normal voting rights. They are also the owners of the company. They take dividend

DEBENTURES
A document under the company seal which provides for the payment of a principal sum and interest there on at regular intervals ( which is usually secured by a fixed or floating charge on the companys property ) OR undertaking which acknowledges a loan to the company.

INTERNAL PLAYERS
The members of the stock exchange can be divided into two parts: A.Broker: He is a commission agent who transacts business in securities on behalf of nonmembers.They may have number of sub-brokers to canvass and secure business for them. B.Jobber: He is an independent dealer securities.He purchase and sells securities in his own name. He is not allowed to deal with nonmembers directly.He works for profit.

 Non-members : The following categories of non members are also permitted to enter trading hall and transact business on the behalf of members. Authorized clerks: They are the assistant or agents. They buy or sell on the behalf of employers. They can not transact business on their own account. Remisers: They are the sub-brokers. He is also called the half commission men.

CAUSES OF PRICE FLUCTUATION 1.DAMAND AND SUPPLY 2.BANK RATE 3.SPECULATIVE PRESSURE 4.ACTIONS OF UNDERWRITERS AND OTHER FINANCIAL INSTITUTIONS 5.CHANGE IN COMPANYS BOARD OF DIRECTORS 6.FINANCIAL POSITION OF THE COMPANY

CONT..
7.TRADE CYCLE 8.POLITICAL FACTORS 9.OTHER FACTORS: A.EXPECTED MONSOON B.PERSONAL HEALTH OF HEAD OF GOVERNMENT OR CHAIRMAN OF THE COMPANY C.OIL PRICES IN THE INTERNATIONAL MARKET.

CONT.
D.CHANGES IN EXCHANGE RATE E.BORDER TENSION F.STOCK BROKERS SCAM LIKE HARSHAD MEHTA AND KETHAN PAREKH G.STRIKES AND LOCK-OUT OF THE COMPANY. H.NEW BUDGET PROPOSALS I.LOBERLIZATION AND PRIVATIZATION OF THE COMPANY.

BUY BACK SHARES In simple term when company re-purchase of its own shares that is called buy back shares.

MODESS OF REPURCHASE
BASICALLY THERE ARE TWO MODES OF REPURCHASE: 1.Open market repurchase: company makes an announcement regarding the repurchase of a specified number of shares. The purchases are made anonymously through a broker from the secondary market over a specified period of time. 2.tender offers: this is basically two types A. Fixed price tender offers: company announces a fixed price at which it is willing to buy its shares, a maximum number of shares that it will commit to buy and an expiration date for the offer. The offer price is premium over the market price to encourage the shareholder.

Cont. Dutch auction tender offers : In a Dutch auction, the company announces the maximum number of shares it wishes to buy and a range of prices at which it will entertain offers. Shareholders who choose to participate must then select a single price in this range at which to tender their shares.

HOW RATING IS GIVEN TO THE COMPANY?

Basically rating is given after see the company 'image,management quality,assets quality,auditors quality,accounting accuracy.Rating is not fixed, it may be change. The rating grades are: AAA: HIGHEST SAFTY AA: HIGH SAFTY A: ADEQUATE SAFTY BBB: MODERATE SAFTY BB: IN ADEQUATE SAFTY BC&D: HIGH RISK AND DEFAULT

CREDIT RATING AGENCY IN INDIA 1.CRISIL 2.ICRA (Internet Content Rating Association) 3.CARE 4.DPCR

conclusion
THE STOCK EXCHANGE IS CONSIDERED TO BE THE BAROMETER OF ECONOMIC ACTIVITY.