STOCK EXCHANGE

Stock Exchange is an organised market for the buying and selling of second hand listed
securities. The stock exchanges deal with all types of securities including Government bends,
Municipal bonds, shares, debentures and units of mutual funds.
Securities Contract (Regulation) Act, 1956 defines a stock exchange as "anybody of individuals,
whether incorporated or not, constituted for the purposes of assisting, regulating or controlling
the business of buying, selling or dealing in securities".
Features of Stock Exchange
1. A centralised market place: A stock exchange is a centralised market place for trading
securities.
2. Deals in second hand securities: Stock exchange deals with shares, debentures, bonds and
such securities issued by the companies.
3. Allows dealings only in listed securities: Stock exchange maintains an official list of securities
that could be traded on its floor.
4. Fair open market price: The buyers and sellers assemble to deal in securities in the most
convenient and specialised way.
5. An Auction Market: A stock exchange is an auction market. Bidders compete with each other
to purchase a particular share at the lowest possible price.
6. Regulates trade in securities: Stock exchange does not buy or sell any securities on its own
account.
7. Price fluctuations: The prices of securities move up and down according to changes in
demand and supply.
8. Opened to all types of investors: A stock exchange is opened to big and small investors. One
can start with as little as few thousand rupees.
9. Element of risk: There is an element of risk in investment in securities as the prices are
influenced by the performance of the company.
10. Wide choice of securities: Investment in securities offers a wide variety of choice according
to the investor's perceptions to investment characteristics.
11. Recognition from Central Government: Stock exchange is an organised market. It requires
recognition from the central government.
12. Financial barometers: Stock exchanges are the financial barometers and development
indicators of national economy of the country.
Functions / Services / Role of Stock Exchanges
1. Provides ready and continuous market for securities: Stock exchanges provide continuous,
ready, open and broad based market for securities.
2. Ensures safety of funds: Stock exchanges ensure safety of funds invested as they are
operated under strict rules and regulations.
3. Supplies long term funds: The securities traded in the stock exchange are negotiable and
transferable with minimum formalities.
4. Channelises savings: Stock exchange mobilises savings into most productive and profitable
channels.
5. Encourages capital formation: The stock exchange plays an active role in the capital
formation of a country.
6. Facilitate evaluation of securities: Stock exchange integrates the demand and supply of
securities in an effective manner. Stock exchange is useful for the evaluation of industrial
security.
7. Serves as economic barometer: Stock exchanges act as a barometer of business conditions
and progress of the business in the country.
8. Facilitates healthy speculation: Healthy speculation is essential to equalize demand and
supply of securities at different places It also regulates the prices of securities considerably.
9. Regulates company management: To get the securities listed in a stock exchange, the
companies have to follow certain rules and fulfil certain conditions.
10. Facilitates public borrowing: Stock exchange serves as a platform for marketing government
securities. It enables government to raise public debt easily and quickly.
11. Provides clearing house facility: Stock exchange provides a clearing house facility to
members. It settles the transactions among the members quickly and with ease
12. Facilitates bank lending: Banks can easily know the prices of quoted securities. They offer
loans to customers against corporate securities.
13. Marketing of new issues: If the new issues are listed, they are readily acceptable to the
public. Public response to such new issue will be relatively high.
Securities Traded in the Stock Exchange
A security market specialises in trading of securities or instruments. The terms 'security' and
'instruments are interchangeably used to mean the same.
Types of Securities
1. Corporate securities
[Link] Securities
A share may be defined as one of the units into which the share capital of a company is divided.
As per the Companies Act, 2013 "a share is the share in the capital of a company and includes
stock".
Equity Shares
According to Section 85 of Companies Act 1956, "an Equity Share is a share which is not a
preference share".
Rights of equity share holders
1. Right to control the management of the company.
2. Right to share in the profits of the company.
3. Right to get right shares on issue of additional shares.
4. Right to receive copies of the Statutory Report, Annual Accounts and Auditors Report.
5. Right to apply to the Central Government to call Annual General Meeting of the company.
6. Right against ultra vires or illegal acts of the company.
Characteristics of equity shares
1. Maturity: Equity shares provide permanent capital to the company and cannot be redeemed
during the lifetime of the company.
2. Claim on income: Equity shareholders have a residual claim on the income of the company.
They have a claim on income left after paying dividend to preference shareholders.
3. Claim on assets: Equity shareholders have a residual claim on ownership of company's
assets.
4. Right to control or voting right: Equity shareholders are the real owners of the company.
5. Pre-emptive right: When a company makes subsequent issue of capital, it must be first
offered to the existing shareholders.
6. Limited liability: Limited liability is the most important feature of equity shares.
Advantages of equity shares
1. Limited Liability: Limited liability is the most important advantage of equity shares.
2. Right to control or voting right: Equity shareholders are the real owners of the company.
3. Free Transferability: Equity shares are freely transferable. The owners of equity shares have
the right to transfer their interest to someone else.
4. Share in the Growth: The major advantage of investment in equity shares is its ability to
increase in value by sharing in the growth of company profits over the long run.
5. Tax Advantages: Equity shares also offer tax advantages to the investor. The larger yield an
equity shares results from an increase in principal or capital gains.
6. Claim on assets: Equity shareholders have a residual claim on ownership of company's
assets.
7. Hedge against Inflation: The equity share is a good hedge against inflation, though it does not
fully compensate for the declining purchasing power.
8. Easy sales: Equity shares can be sold more easily than other instruments.
Disadvantages
1. If only equity shares are issued, the company cannot take the advantage of trading on equity.
2. There is a danger of over capitalisation as equity share capital cannot be redeemed.
3. In periods of prosperity equity shareholders will get high dividend which will lead to increase
in the value of shares and speculation.
4. The control of the company can be easily manipulated by a group of shareholders for their
personal interest.
5. Investors who desire to invest in safe securities with a fixed income will not prefer equity
shares
Classification of Equity shares
1. Blue chip shares: These are the shares of well reputed companies having an impressive track
record for better earnings and stable dividend policy.
2. Growth Shares: These are the shares of growing companies, having wide scope for
expansion and diversification of their business by retention of earnings.
3. Defensive shares: These are the shares of companies that are relatively unaffected by the
ups and downs in general conditions.
4. Income Shares: These are the shares of companies having fairly stable operations with
relatively limited growth opportunities. Such shares generate high current yield with very little
chance for capital gain yield.
5. Cyclical shares: These are the shares whose yield and market prices move upward or
downward according to the economic oscillations leading to booms and depressions.
6. Speculative Shares: These shares need not be well known and popular earners of dividend,
Unexpectedly the price of share is increased for a shortwhile and get extensive saving.
7. Stalwarts: Shares of giant companies that are faster than slow growers but are able to
surpass the growth rate of gross national product of a country are known as stalwarts.
8. Fast Growers: These are the shares of aggressive new enterprises that grow at 20% to 25%
a year which is also the growth of the economy.
9. Slow Growers: These are the shares of large and aging companies that grow at a lesser rate
than that of The Gross Domestic Product-GDP.
10. Turn arounds: The shares of companies having accumulated losses, but which show signs
of recovery are known as turn arounds.
11. Asset plays: Shares of companies that have valuable assets which have been over looked
by the investors of the stock market are known as Asset plays.
Preference Shares
Preference share capital means that part of the issued share capital of the company which
carries or would carry a preferential right with reference to-
a. payment of dividend, either as a fixed amount or an amount calculated at fixed rate, which
may either be free of or subject to income tax; and
b. repayment, in the case of winding up or repayment of capital, as specified in the
Memorandum or Articles of the company.
Features of Preference Shares
1. Preference shares are long-term source of finance
2. The dividend payable on preference shares is generally higher than debenture interest.
3. Preference shareholders get fixed rate of dividend irrespective of the volume of profit.
4. It is known as hybrid security because it also bears some characteristics of debentures
5. Preference dividend is not tax deductible expenditure.
6. Preference shareholders do not have any voting rights.
7. Preference shareholders have the preferential right for repayment of capital in case of
winding up of the company
8. Preference shareholders also enjoy preferential right to receive dividend.
Types of Preference Shares
1. On the basis of right of cumulation of dividend:
a. Cumulative Preference Shares: Cumulative Preference Shares are those shares which carry
the right to cumulative dividends.
b. Non-Cumulative Preference Shares: These are the Preference Shares which do not carry the
right to receive arrears of dividend.
2. On the basis of right to surplus profits:
a. Participating Preference Shares: Preference Shares having right to participate in the surplus
profits and assets of the company after paying off the equity shareholders.
b. Non-participating Preference Shares: Preference shares which have no right to participate on
the surplus profits and assets of the company
3. On the basis of redemption:
[Link] Preference Shares: These are shares which a company may issue on the
stipulation that they may be repaid either after a fixed period or even earlier at the company's
option.
b. Irredeemable Preference Shares: These are shares which are redeemed (repaid) only on
winding up of the company.
4. On the basis of conversion:
A. Convertible Preference Shares: These are the shares which enjoy the right to get converted
into equity shares at a later date.
b. Non-convertible Preference Shares: Preference Shares which are not convertible into equity
shares
Merits of preference shares
1. No legal obligation: Payment of dividend to preference shares is not a legal obligation of the
company.
2. No maturity date: Preference shares have no final maturity date, except in the case of
redeemable preference shares.
3. Add to the equity base: Preference shares add to the equity base of the company and
therefore, strengthens the financial position of the company.
4. Save the company: Preference shares save the company from paying higher rate of interest.
5. No charge on assets: Issue of preference shares does not create any sort of charge against
assets of the company.
6. Helps equity shareholders: As preference holders get only a fixed rate of dividend, the equity
share holders get a high rate of dividend.
7. Do not affect existing control: Issue of preference shares will not affect existing control of the
company.
8. Cheaper: Financing through preference shares is cheaper than that of equity financing.
9. High return with low risk: It is useful to investors who want to get higher rate of return with low
risk.
10. Help to utilise surplus fund: The company can utilise its surplus funds for redeeming
preference shares as per the provisions of the Company's Act.
Demerits of preference shares
1. Not considered for taxation purposes: Preference dividend is not deductible as an expense
for taxation purposes, out of the profits of the company
2. Declaration of arrears of dividend: In case of cumulative preference shares, arrears of
dividend have to be declared before anything can be paid to the equity shareholders of the
company.
3. Dilute the claim of equity shareholder: Preference shares dilute the claim of equity
shareholder over the assets of the company
4. Pave the way for insolvency: Preference shares may pave the way for insolvency of the
company.
B. Creditorship securities
Debentures / Bonds
The word debenture is derived from 'debera', a Latin word which means 'to owe a debt. It is
only a written document issued by a company as an evidence of its debt capital.
A debenture is defined as "an instrument in writing acknowledging a debt under the seal of the
company, usually secured by a fixed or floating charge on the assets of the company, bearing a
fixed rate of interest and repayable within or after a specified period or irredeemable during the
existence of the company.
Kinds of Debentures
i. On the basis of Transferability
a. Registered Debentures: These are debentures registered in the book 'Register of Debentures
of the company.
b. Bearer Debentures: The names and other details of bearer debentures are not recorded in
the 'Register of Debentures' of the company.
ii. On the basis of Security
a. Secured or Mortgage Debentures: These are debentures which are secured by a fixed or
floating charge on the assets of the company.
b. Simple or Unsecured Debentures: These debentures carry no security with regard to
repayment of principal and interest. They are also called "naked debentures".
iii. On the basis of permanence (Redeemability)
a. Redeemable Debentures: Debentures, the principal amount of which is repayable after a
specified period of time are called redeemable debentures.
b. Irredeemable Debentures: Debentures, which are not repayable during the life time of the
company are called irredeemable debentures.
iv. On the basis of convertibility
a. Convertible debentures: A convertible debenture can be converted into equity shares of the
same company at the option of the holders.
b. Non-convertible Debentures: Debentures which are not convertible into shares of a company
are called non-convertible debentures.
v. Priority
a. First Mortgage Debentures: These debentures are payable first out of the property charged.
b. Second Mortgage Debentures: These debentures are payable after satisfying the first
mortgage debentures.
Features of Debentures
1. Maturity: Generally, debentures are to be repaid at a definite time as stipulated in the issue.
2. Claim on income: A fixed rate of interest is payable on debentures. A company has a legal
obligation to pay the interest on due dates, irrespective of its level of earnings.
3. Claim on assets: Debenture holders have priority to claim on assets of the company. They
have to be paid first before making any payment to the preference or equity shareholders in the
event of liquidation of the company.
4. Control: Debenture holders are the creditors of the company. They do not have control over
the management of the company.
Advantages of Debentures
a. To the company
1. It provides long term finance to a company.
2. The rate of interest payable is less than the rate of dividend on shares.
3. Interest on debenture is a tax deductible expense
4. Debt financing does not dilute control.
5. It enhances trading on equity.
6. Redeemable debentures provide flexibility in the capital structure of a company.
b. To investors
1. It provides fixed and regular income.
2. It is comparatively safer investment.
3. As it has definite maturing period, most investors prefer debentures.
4. Investors can mortgage the instrument to obtain loans.
5. Interest of debenture holders is protected by debenture trust deed and SEBI guidelines.
2. Government Securities
The government is the single largest borrower of our country. The debt contracted by the
government is known as public debt and the administration of the debt is carried out by the
regional Public Debt Officers' of the RBI. The public debt is raised through market borrowing by
the issue of securities known as Gilt Edged Securities.
Characteristics of Government Securities
1. Government securities are unique financial instrument in financial market
2. The normal value of government securities is generally fixed at ₹1000 and interest is payable
half yearly.
3. Government securities have a very poor secondary market in India. There is not even a
regular market for treasury bills.
4. Government securities are underwritten by RBI and brokers role is not significant in both
primary and secondary markets.
5. The government implements its fiscal and monetary policy by the issue of securities.
3. Primary Securities
Primary securities are the securities issued by the ultimate users of capital to the ultimate
savers of capital. It is a direct investment in securities issued by companies, government and
financial institutions.
4. Derivatives (Secondary Securities)
These are the instruments issued by financial intermediaries to the ultimate savers of capital.
The financial intermediary may in turn use the resources in the acquisition of primary securities.
5. Variable Yield Bearing Securities
These are the securities having no definite scheme for paying a periodical or regular fixed
returns. The return of the investors is varying in accordance with the volatile nature of profit.
6. Fixed Income Bearing Securities
These are the securities with fixed rate of dividend or interest. A periodic income is assured to
fixed income bearing securities. There is no relationship between the level of earnings and
return on investment.
7. Negotiable Securities
A negotiable instrument is not a security in the strict sense of the term. Negotiable securities are
the securities which can be negotiated by endorsement and delivery. Negotiation gives a better
title to a bonafied holder who take the security for value and in good faith.
8. Non Negotiable Securities
These cannot be negotiable by mere delivery or endorsement and delivery. The title to the
transferee can be perfected only by observing certain legal formalities. For transferring shares
or debentures a transfer deed is to be executed in the prescribed manner.

MAJOR STOCK EXCHANGES IN INDIA

Bombay Stock Exchange (BSE)
Bombay Stock Exchange is the oldest stock exchange in India, located at Dalal Street,
Mumbai. It was established in 1875 and is Asia's first stock exchange.
Bombay Stock Exchange Limited has two segments. They are:
i. Capital Market Segment, where shares are traded, and
ii. Derivative Market Segment, where futures and options are traded.
Major Objectives of BSE
1. to safeguard the interest of the investing public.
2. to establish and promote honest and just practices in security transactions.
3. to promote, develop and maintain a well regulated market for dealing in securities, and
4. to promote industrial development in the country
Capital Requirements
1. the minimum issued equity capital of 3 crores.
2. profitability record of at least 3 years.
3. the minimum market capitalisation of 20 crores
4. trading for a minimum of 50% of the total trading days during the same 6 months on any
exchange and
5. the minimum average volume traded per day during the last three completed months should
be 500 shares and at least five trades per day.
National Stock Exchange of India (NSEI)
NSEI was set up in November 1992 and became recognised with effect from April 26, 1993. As
on March 2017, it is the world's 10th largest stock exchange. It commenced its operations in the
capital market on 3rd November 1994 in Mumbai. It was incorporated with an equity capital of
25 [Link] started derivative trade operations in June 2000.
Objectives of NSEI
1. To establish nationwide trading facility for equities, hybrids and debts.
2. To facilitate equal access to investors across the country.
3. To provide fairness, efficiency and transparency to the securities trading.
4. To enable shorter settlement cycles,
5. To meet international securities market standards.
Features of NSEI
1. NEAT trading system: The trading system of NSEI is known as National Exchange for
Automated Trading (NEAT).
2. Segments of securities: It has three segments
i. The capital market segment: It covers equities, convertible debentures and debt instruments.
ii. Wholesale debt market segment: It deals with high value transactions in government
securities, public sector bonds, commercial papers and other debt instruments.
iii. Retail trade segment: It deals in debt instruments like non-convertible debentures.
3. No trading floor: There is no trading floor as is prevalent in the traditional stock exchanges.
4. Various committees: The exchange operates various committees to advice it on areas such
as good market practices, settlement procedures, risk containment system etc.
5. Order driven system: The NSE has opted for an order driven system. The system provides
enormous flexibility to trading members.
6. Confirmation slip: When trade takes place, a trade confirmation slip is printed at the trading
member's work station.
7. Identity of trading member is not revealed: When an order is placed or when his pending
orders are delayed.
8. Statements of position: On the eighth day of trading, each member gets a statement showing
his net position, amount of cash he has to transfer to the clearing house etc.
9. Pay out day: Members are required to deliver securities and cash by the thirteenth and
fourteenth days respectively. The fifteenth day is the payout day.
10. High volume: The trading member can transact a high volume of business efficiently by
automated trading system.
Membership in NSEI
For admission in a NSE, a written examination and an interview is conducted. The interview is
done by a committee consisting of experienced people from the industry to sucess the
applicant's capability to operate as an exchange menter.
Eligibility requirements for membership
A. Trading membership in the capital market segment:
i. Eligibility: Individuals, body corporates, institutions and registered persons are eligible for
membership in capital market segment.
ii. Minimum Networth: The minimum networth required is ₹75 lakhs for individuals and1 crore for
body corporates.
[Link] paid-up capital: The minimum paid up capital required is 30 lakus in the case of
corporate bodies.
[Link] qualification: Minimum
qualification required is graduation, two years experience of dealing in capital market.
B. Trading membership on the wholesale debt market segment:
i. Eligibility: Members eligible are corporate bodies, institutions and other entities as may be
permitted by RBI or SEBI.
ii. Minimum networth: Minimum networth required is 2 crores.
iii. Minimum paid up capital: Minimum paid up capital required is 30 lakhs in the case of
corporate bodies.
iv. Minimum qualification: The whole time directors or the dealers should possess at least 2
years experience in any activity, related to banking or financial services.

LISTING OF SECURITIES
Listing is the inclusion of the name of the company in the official trade list of securities, which
can be dealt within a stock exchange.
Requirements/Conditions for listing
1. The minimum issued capital of a company shall be 10 crores in the case of large companies
and 3 crores in the case of small companies.
2. The minimum public offer of equity capital shall be 60% of the total issue.
3. Prospectus shall be scrutinised by the stock exchange.
4. Memorandum and Articles of Association must contain prescribed provisions.
5. The company should give an undertaking, specifying that it shall not indulge in certain
activities prohibited by law.
6. Allotment should be equitable, fair and unconditional.
7. Listing of securities on more than one stock exchange is obligatory for any company whose
paid up capital is above 5 crores.
8. There should be atleast 3 years lock in period for promoters contribution.
9. Minimum share holders required is 10 persons, for every 1 lakh of fresh issue of capital.
10. Minimum share holders of 20 for every one lakh of additional issue.
Procedure for Listings
1. Filing Listing Application
Just before issuing securities to the public, the company through its lead managers consult the
stock exchange authorities seeking permission for listing of [Link] following documents
are also to be accompanied.
a. A brief history of the company since its incorporation.
b. Copies of Memorandum and Articles of Association.
[Link] of prospectus,
d. Certified copies of agreements
e. Particulars of shares and debentures and the prices at which they are issued,
f. Particulars of commission to brokers.
g Certified copies of acknowledgment card
2. Securing Final Approval for Listing
After the issue formalities are completed, the final listing permission should be sought from the
stock exchange authorities within 10 weeks (70 days) from the date of closure of subscription
list.
Listing obligations
[Link] date of the board meeting at which the declaration of dividend or the issue of right or
bonus share will be considered.
b. Any change in companies managerial personnel by death, resignation or removal.
c. Any issue of new shares, right shares, or the issue of bonus to members
d. Any change in the capital structure of the company
e. Any material change in the general character or nature of the company's business,
f. Any re-issue of forfeited shares
g. Any other information necessary to enable the share holders to appraise the companies
position.
the company has to forward to the stock exchange, the following:
a. Copies of all notices and circulars sent to the share holders including proceedings of general
meetings.
b. Certified copies of all resolutions passed by the company.
c. Copies of statutory and annual reports, annual audited accounts and director's reports.
d. Annual return of atleast the principal holders of each class of security of the company.
Advantages of Listing
1. Advantages to the company management
i. Provides higher status: Listing gives the management and the company a higher status which
facilitates financing of expansion programmes.
ii. Helps in raising finance: Listed companies can raise finance very easily because of the
transparencies involved in all activities.
iii. Fiscal benefits: The listed companies enjoy concessional rates of income tax, as they are
treated as widely held companies.
iv. Positive attitude of financial institutions: Listed companies are treated favourably by the
financial institutions and commercial banks.
2. Advantages to the Investors:
 i. Enhances Liquidity: Listing makes the securities more prestigious, which enhances their
marketability. It also enhances liquidity to the securities of the listed companies.
ii. Enjoys certain concessions: Holders of listed securities are eligible for certain concessions in
matters relating to income tax and other taxes.
iii. Enjoys public confidence: Listing enhances the public confidence in the securities of listed
companies.
iv. Easy availability of loans: The bankers usually readily accept the listed securities for
providing loans and other accommodation as they have high collateral value.
[Link] of the security: Listed companies have to make fair disclosure of certain key
information.
vi. Enhances safety: Listed securities ensure safety to the funds of the investors.
vii. Wider marketability of shares: Listing enables the company to mobilise the savings from all
over the country.
viii. Information about the worth of securities: The investing public gets regular information about
the worth of securities, by market quotations.
Disadvantages of Listing
1. Rigid regulatory measures: Listed companies are subjected to undergo various regulatory
measures of the stock exchanges and the SEBI.
2. Disclosure of vital information: Listing requires disclosure of vital information such as plans for
expansion, diversification, acquisition of certain brands, etc. to the stock exchanges.
3. Wide price fluctuations: Listing might enable speculators to drive up or drive down prices at
their will.
4. Fail to be true economic barometer: In case of excessive speculation, share prices might not
reflect its fundamentals.
5. Insider trading: Listing of securities may induce the management and the top level employees
to indulge in insider trading by getting access to important information.
6. Additional cost: Listing requires sending notices of Annual General Meeting. Annual Reports,
etc, to a large number of shareholders.
Trading Procedures (Methods of Trading in a Stock Exchange)
1. Finding a broker
The first step in trading shares is to select a broker for transacting business on behalf of the
investor. The stock broker is a licensed member of a stock exchange.
2. Opening an account with the broker
After selection of the broker the investor will proceed to open an account with the broker. A
broker opens an account in the name of the prospective client only if he is satisfied about the
credit worthiness of the investor.
3. Placing the order
After selecting the broker and opening an account with the broker, the investor places an order
to buy a specified number of shares of a specified company. The investor can place an order by
telephone, fax or in person.
a. At best order: It is an order which doesn't specify any specific price. It must be Executed
immediately at the best possible price.
b. Limit order: It is an order for the purchase or sale of securities at a fixed price specified by the
client.
[Link] or cancel order: It is an order for the purchase or sale of securities immediately at
the quoted price.
d. Discretionary order: It is an order to buy or sell securities at whatever price the broker thinks
reasonable.
e. Limited discretionary order: It is an order to buy or sell securities within a specified price
range and within the given time period as per the best judgement of the broker.
f. Open order: It is an order to buy or sell without fixing any time limit or price limit on the
execution of the order. It is similar to discretionary order.
[Link] loss order: It is an order to sell as soon as the price falls upto a particular level or to buy
when the price rises upto a specified level.
h. Fixed price order: When the client specifies the price at which the shares are to be
purchased, it is known as fixed price order
4. Executing the Order
The floor of the stock exchange is usually divided into a number of markets according to the
security which is dealt in there. The authorised clerk goes to the bit (the particular part of the
floor where he can find securities mentioned in the order) and make his own quotation for the
purchase or sale according to the conditions of the market.
5. Preparation of contract notes
At the close of the working day the authorised clerks enter the details of the business transacted
during the day in the Kacha souda book from the rough notes and from it the pucca souda book
is prepared separately for the ready delivery contracts and forward delivery contracts.
6. Settlement of contracts
Finally the settlement is made by means of delivering the share certificates along with the
transfer deed. The transfer deed is duly signed by the transferor ie the seller. It bears the stamp
of the selling broker.
Speculation
Speculation means buying or selling of risk securities with the expectation that price will
increase or decrease in future.
Speculator
A speculator is a person or an entity with high risk tolerence that trades securities essentially
with the expectation that the price will go up or down in the short run.
Kinds of Speculators
1. Bull: A bull is an optimistic stock market speculator, who enters into agreement to buy
securities in the expectation that prices of the securities in which he deals will rise in the
short-term.
2. Bear: A bear is a pessimistic stock market speculator, who enters into agreement sell
securities in the expectation that prices of the securities in which he deals will f in the short-term.
3. Stag: A stag is a cautious speculator in stock exchange who subscribes to new issue of
shares, expecting that the prices of the shares will rise when they are traded in the market.
4. Lame duck: Lame duck refers to the situation of a bear who is not able to meet his
commitments. It refers to a trader who has defaulted on a debt or has become bankrupt due to
his inability to cover trading losses.
Speculative transactions in Stock Exchanges
1. Wash sales: Wash sale refers to a transaction in which a speculator sells a particular security
through one broker 'and buys the same security at higher price through another broker.
2. Arbitrage: Arbitrage refers to benefiting from the difference in price of a security prevailing in
two exchanges.
3. Cornering: Cornering refers to the situation in which major portion of the shares of a company
is held by an individual or group of individuals. It leads to rigging, where the speculators enter
into purchasing contracts with the bears in certain securities.
4. Rigging the Market: Rigging refers to the practice of artificially hiking the prices of certain
shares in a bull market. So market value of a particular security is pushed up 2 due to bull
movement.
5. Blank transfers: It is a method of transfer without mentioning the name and signature of the
transferee in the transfer deed. It facilitates speculative activities. The transferor simply signs the
transfer form without specifying the name of the transferee.
6. Margin Trading: Margin trading refers to the process whereby individual investor buy more
stocks than that they can afford to. Under this method, the client open account with his brokers.
7. Option dealing: Option refers to a right to buy or sell securities at specified prices within a
stated time. A speculator is given the right to buy or sell on the settlement day, or else he would
forfeit the option money.
i. Call option: It is the right to buy shares under a negotiable contract. The bull speculators
generally enter into call option dealings.
il. Put option: It is the right to sell certain securities at a certain price on a future date. It is
generally made by bear speculators.
iii. Double option/Put and call option: It is a combination of put option and call option. It is a right,
given for a specified sum, either to buy or sell securities.
8. Matched Orders: This is taken up when a speculator wants to create an impression in the
market that a stock is active. For this purpose, two brokers are employed, one to buy and the
other to sell at pre-fixed prices.
9. Buying in and selling out: These are two departments to enable the aggrieved parties to
exercise remedies, when the members become defaulters.
10. Bucket shops: It is the method of buying and selling of securities outside the stock
exchange. It is an illegal speculative transaction.
11. Hedging: It is a device through which a person protects himself against loss. A 'bull' agreeing
to purchase a security for someone may hedge or protect himself by buying a put option,
12. Carry over or Badla transactions: In case of forward delivery contracts, if both the parties
agree, the contract can be settled in the next settlement date (probably in the next month or
fortnight).
Depositories
A depository is an organisation which holds the shares in the form of electronic account in the
same way a bank holds the money.
A depository may be defined as "an institution which transfers the ownership of securities in
electronic mode on behalf of its members".
Objectives of Depository
1. To minimise the paper work: The main objective of a depository is to minimise the paper
works involved with ownership, trading and transfer of securities.
2. To reduce the time for transfer: Depository system reduces the time for transfer of securities
as it is done through simple account transfers.
3. To eliminate risk: It eliminates the risks connected with bad deliveries, forgery duplicate share
certificate, etc.
4. To enhance liquidity: It enhances liquidity and efficiency of securities by facilitating their easy
transfer.
5. To reduce cost: The cost of transacting in a depository environment is considerably lower as
compared to transacting in certificates.
6. To maintain accurate records: Depository system maintains an accurate record of investors
holdings by keeping the details in electronic form.
7. To attract foreign investment: It promotes the country's competitiveness by complying with
global standards.
Role / Activities of the Depository
1. Accepting deposit of securities for custody.
2. Making computerised book entry deliveries of securities which are immobilised in its custody.
3. Providing for withdrawal of securities.
4. Undertaking corporate actions like distribution of dividend and interest.
5. Redemption of securities on maturity.
Interacting Institutions
1. Central Depository: The Central Depository is a nominee who holds the securities on behalf
of the investors and maintains records related to that in an electronic mode
2. Share Registrar and Transfer Agent: The Registrar of issue is an institution that controls the
issuance of the securities.
3. Clearing and Settlement Corporation: It is a centre to do trade matching and settle the funds
and exchange securities.
Depository Process
1. Notification by Stock Exchange: The stock exchange concerned where the sharm are listed
will come out with a notification for the dematerialization of shares.
2. Dematerialization Form: The shareholder will obtain the Dematerialisation requires form from
the Depository Participant (DP).
3. Registering of shares: When the DP hands over the securities to the depository, the securities
will be sent to Share Registrar, who will register the depository name and the particulars of
shares.
4. Crediting the investor account: In the last stage, the Depository will inform the D.P the details
of shares registered in the name of the shareholder concerned.
Benefits of Depository System
Benefits to Investors
1. Eliminates paper work: This system will eliminate paper work as the physical movement of
certificates for transfer process is not needed.
2. Eliminates risk: Risk of bad deliveries, fraud, mutilated and lost or misplaced share
certificates will not exist.
3. Shorten settlement time: The electronic media will shorten settlement time and so the investor
can save time and increase the velocity of security movement.
4. Frequently changes in portfolio: Investors will be able to change portfolio more frequently.
5. Not time consuming: The distribution of dividends, interest and other benefits will be speedier
as the ownership can be easily identifiable.
6. Less cost: The cost of transfer is less as the share transfers are exempt from stamp duty.
Benefits to Companies
1. Helps to know the particulars of beneficiaries: The companies will be able to know the
particulars of beneficiaries and their holdings periodically.
2. No rush for transfer related activities: At the time of declaration of dividends or issue of bonus
shares or right shares.
3. Reduces complaints: Investor complaints like signature difference, mutilated certificates,
delay in transfer will be reduced.
4. Productive works can be done: As paper work is reduced, the staff of the company may be
deputed to other productive works.
5. No delay in send annual reports: It helps to send annual reports and notices without delay as
all details are in the Depository book.
Benefits to the Capital Market
1. More transparent: There will be more transparency in trading, clearing and settlement
mechanism because of highly automated system.
2. Efficient and automated market: By using computers and telecommunication technology for
the back office activities.
3. Improvement in the confidence of investors: The investor's confidence will be improved due to
the highly automated and efficient system.
4. Attracts foreign investors: Foreign investors will start participating in the market
5. Increases the volume of trade: The existence of depository will result in increase in the
volume of trade both by number and value.
6. Attracts Indian middle income group: It will attract more number of the Indias middle income
group into the capital market.
CREDIT RATING
Credit rating means rating or judging of financial and business prospects of an individ or a
business firm.
Standard and Poors defines credit rating as, "the current assessment of the crede worthiness of
an obligator with respect to specific obligation"
Objectives
1. Unbiased opinion: If credit rating is effectively done, it provides an unbiased opinion about the
credit standing of the institution.
2. Dependable information: Information provided by credit rating agencies are usually
dependable as they are based on scientific analysis.
3. Understandable information: The information provided by credit rating agency is easily
understood even by a layman,
4. Risk and return assessed: Credit rating helps to assess the risk and return associated with
the issue and thereby provides a basis for investment.
5. Healthy discipline: In order to maintain and improve the credit rating, companies try to induce
healthy discipline in the organisation.
6. Formation of public policy: Regular credit rating and dissemination of the information lead to
creation of good public policy.
Significance / Benefits / Importance of Credit Rating
1. Facilitates easy resource mobilisation: A company with highly rated instrument finds it easy to
raise resources from the public.
2. Reduces cost of borrowing: Companies will be in a position to quote lesser interest on those
instruments which are highly rated.
3. Reduces cost of public issues: A company with highly rated instruments has to make least
efforts in raising funds through public.
4. Rating builds up image: Companies with highly rated instruments enjoy better goodwill and
corporate image in the eyes of customers, shareholders, investors and creditors.
5. Rating facilitates growth: Rating motivates promoters to undertake expansion of their
operations or diversify their production activities thus leading to the growth of the company in
future.
6. Recognition to unknown companies: While entering into market, investors rely more on the
rating grades than on 'name recognition".
7. Safety of investments: Highly rated issues give an assurance of safety to the investors.
8. Recognition of risk and returns: Credit rating symbols indicate both the returns expected and
the risk attached to a particular issue.
9. Freedom of investment decisions: Investors can base their decisions on rating symbols
attached to a particular security.
10. Dependable credibility of issuer: Absence of any link between the rating agency and rated
firm ensures dependable credibility of issuer and attracts investors.
11. Easy understanding of investment proposals: Investors do not require any spesial skill in
assessing the company they can rely on the credit symbols while taking decisions.
12. Relief from botheration: Credit rating relieves investors from knowing the detach of the
company.
Credit rating factors
1. Ability to service debt: The ability of the issuer to service debt is an important facte affecting
credit.
2. Nature of debt: The volume and composition of outstanding debt is an important factor which
influences credit rating.
3. Stability of cash flows and earnings: Credit rating is influenced by the stability of future cash
flows and earning capacity of the company
4. Interest coverage ratio: This ratio indicates how many times the issuer is able to meet its fixed
interest obligations.
5. Liquidity position: Current ratio is calculated to assess the liquidity position of the issuing firm
6. Collateral security: The value of assets pledged as collateral security and the security's
priority of claim against the issuing firm's assets is again a factor which influences credit rating.
7. Market position: This is judged by the demand for the products, competitor's market share,
distribution channels etc.
8. Operational efficiency: It is judged by capacity utilisation, prospects of expansion,
modernisation and diversification, availability of raw material etc.
9. Track record: Track record of promoters, directors and expertise of staff also afet the rating of
a company.
Credit rating process
1. Receipt of proposal for rating : The rating process begins with the receipt of proposal from a
company who wishes to get its issue obligations rated.
2. Agreement: An agreement is entered into by the rating agency and the issuer company. The
agreement shall contain all the terms of the rating assignment.
3. Assignment to analytical team: Rating agency appoints a team consisting of analysts who are
qualified to carry out rating assignment.
4. Obtain information: The analytical team obtains the requisite information from the client
company.
5. Visits and meeting with management: To obtain clarification and better understanding of the
client's operations, the team visits and interacts with the company's executives
6. Analysis: The team analyses the data and information obtained for the rating purpose.
7. Presentation of findings: After completing the analysis, the findings are discussed with the
internal committee, comprising of senior analysts of the credit rating agency.
8. Rating Committee meeting: The committee is the final authority for assigning ratings.
9. Communication of decision: The rating arrived at is presented to the client who has the option
to accept or reject it.
10. Dissemination to the public: If the rating is accepted by the client, the agency gives it for
notification in press or websites.
11. Monitoring for possible change: Rating is not a one-time process, the agency constantly
monitors all ratings with the trends in the market.
Rating Agencies (Credit Rating Agencies)
1. Credit Rating Information Services of India Ltd. (CRISIL)
It is the first credit rating agency in India and was jointly promoted by ICICI and UTI in 1987.
The other shareholders include: Asian Development Bank (ADB), LIC, SBI, HDFC and GIC.
Objectives of CRISIL
1. To assist both individual and institutional investors in making investment decisions in fixed
income securities.
2. To enable corporates to raise large amounts at fair cost from a wide spectrum of investors.
3. To enable intermediaries in placing their debt instruments with investors by providing them
with an effective marketing tool.
CRISIL offers the following services to corporates i.e. 1. Rating services 2. Information services
and 3. Advisory services
2. Investment Information and Credit Rating Agency of India (IICRA) Ltd.
IICRA was mainly promoted by IFCI Ltd. in 1991 to cater to the requirements of corporates in
the northern region of the country. SBI, UTI, Punjab National Bank, LIC, GIC, EXIM Bank and
Bank of India are the other shareholders.
The following are the services it provides: 1. Rating of debt instruments 2. Rating of Equity 3.
Company rating and 4. General Assessment at the request of banks and other potential buyers.
3. Credit Analysis and Research (CARE) Ltd.
It was promoted by IDBI jointly with other development financial institutions, banks and finance
companies in 1993. The instruments credit-rated by CARE are debentures, fixed deposits,
certificates of deposits, commercial paper and structured [Link] is the latest entrant
in this sector and provides the following services:1. Rating of debt instruments 2. Rating of
companies and countries at their request 3. Rating of Commercial Paper.
4.. Onida Individual Credit Rating Agency of India for non-corporates (ONICRA) Ltd.
ONICRA Ltd. was sponsored by Onida Finance Ltd. It is the first credit rating agency in India
established to rate the credit-worthiness of non-corporates or individual [Link] kind of
credit rating is useful while -
a. applying for the issue of credit cards
b. granting of housing loans
c. leasing or hire purchase
d. entering into rental agreements
e. sanctioning personal loans, bank finance etc.
Credit information companies licensed by Reserve Bank of India
The Reserve Bank of India has given licenses to four companies to do rating business in India.
They are: (i) The Credit Information Bureau (India) Limited (CIBIL), (ii) Experian, (iii) Equifax and
(iv) Highmark. Of these, CIBIL is the most popular credit information company.