When companies require funds for running or the expansion of their business they raise funds by issuing shares or debentures to the investors. By becoming a shareholder, the investor actually becomes a joint owner of the company.
The debenture holder is a person who has given money to the company in the form of a loan for which he is entitled to receive interest as specified and the capital is returned to him on a specified date.
When companies earn profits, they distribute it in the form of dividends to the share holders’. These companies will get their shares listed on the stock exchanges, and therefore provide for the trading (buying or selling) of their issued securities.
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 facilitates for 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. The trade on an exchange is only by members.
Stock markets are a vital part of any free economy, it provides access to companies to raise capital and also an opportunity to the investor to make gains by trading with these issued securities on the stock exchanges.
The equity markets are classified into two categories: Primary Markets and Secondary Markets.
Primary Markets: When companies need to raise funds and issue securities in the form of shares, debentures, preference shares, bonds, etc, they do this by making public offers and the investors subscribe to these offers. This kind of markets is referred to as Primary Markets.
Secondary Markets: The virtual market where the securities are traded on a day to day basis is called the secondary markets. (Also referred as Stock Markets.)
In India Stock exchanges have a history of nearly 200 years. The first stock exchange formed was Bombay Stock Exchange and was started in 1830’s. In 1956, Government of India recognized that under the Securities Contracts (Regulation) Act.
Many regional exchanges came up after this. They played an important role by providing platforms for regional and smaller companies to be listed and traded.
The formation of the National Stock Exchange took place on Nov 4th, 1994 and screen based trading was introduced in India. An electronic market place was introduced to India. Over a period of time National Stock Exchange has become the premier stock exchange of India and has over taken Bombay Stock Exchange in a big way. All regional exchanges have got terminated by SEBI.
All stock exchanges in India are regulated by SEBI – SECURITES AND EXCHANGE BOARD OF INDIA – under the SEBI ACT, 1992.
The participation in stock exchanges can be done only through its Members – who are also referred to Stock Brokers. To become a member of any recognized stock exchange – a due diligence process is followed and a registration has to be done with SEBI for the same. Both these aspects are compulsory followed and certain benchmark standards have to be adhered to.
Trading on the Stock Exchanges:
Every investor who wants to trade on the stock exchange directly has to get enrolled with Stock Broker /Sub Broker by filling with KYC (KNOW YOUR CLIENT) form and complete the process. He will be assigned a unique client code and he can be tracked by his PAN number. He is expected to open a demat account also, with any of the registered depository participants. He may have to bear some basic charges for the registration process. Once the client code is allotted and his demat account becomes operational he can commence trading on the exchanges.
He will be issued a contract note on a day wise basis for transactions done on his behalf by his stock broker.
All other levies like Service tax, Securities Transaction Tax, Transaction Charges and Stamp Duty are have to compulsorily printed, on the contract note. The investor can verify the trade done on his behalf on the websites of The National Stock Exchange and Bombay Stock Exchange by doing a search with the trade number.
The contract note has to be issued within 24 hours of the trading day. Contract notes are issued in physical or electronic form. Both modes of issuances are allowed by regulation In India.
The Pay-In and Pay – out Process for the Funds as well As Securities is done on a T+2 days. (T is referred to the trading day – and the 2 days are referred as working days.Sat & Sun are not considered trading days.)
The stock brokers are expected to complete the funds and securities pay out process within 48 hours of the payout date. The securities and Funds Pay-In for clients is generally done on T+1 basis – as the process with the exchange has to be executed with the exchange on T+2 basis. The settlement calendar is released by the respective exchanges well in advance.
Whenever an investor fails to deliver the securities sold by him on the due date, the exchange conducts an auction for the respective security. The auction is a process which the exchange purchases the security from a fresh seller and delivers the security to the original buyer. The auction is conducted in a separate market segment type and the price difference of the security has to be borne by the defaulting original seller.
The stock brokers are expected to maintain very accurate books of accounts for the transactions done by them on behalf of clients as well for proprietary book.
The Regulator as well as the exchanges conduct regular periodic audit of the books of the brokers. Stringent action in the form of penalties as well as suspension is taken for non – adherence of the regulations.
The stock brokers are expected to collect margins upfront from the clients before entering into trades on behalf of them. The margins can be collected in the form funds as well as securities.
The maximum brokerage chargeable by a main broker is 2.5% and 1.5 % by a sub – broker.
Today the stock exchanges have been running very successfully, facilitating huge volumes on a daily basis. Besides providing an excellent platform for secondary market operations, they current facilitate successful biddings Initial Public Offer, Book Building, Reverse Book Building, and Offer for Sale.
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Disclaimer: This data above does not purport to be advice nor a complete guide on products or investing. An Investor must consult a licensed professional, on any of his investment decisions before investing.
Source: Nseindia.com and bseindia.com.