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Stock Exchange

Stock Exchange

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Published by: Raj on Oct 01, 2008
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11/06/2012

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STOCK EXCHANGE
Of all modern service institutions, stock exchanges are perhaps the mostcrucial agents and facilitators of entrepreneurial progress. After the industrialrevolution, as the size of business enterprises grew, it was no longer possible forproprietors or even partnerships to raise colossal amounts of money required forundertaking large entrepreneurial ventures. Such huge requirement of capitalcould only be met by the participation of a very large number of investors: theirnumber running into hundreds, thousands and even millions, depending on the sizeof the business venture.In general, small-time proprietors, or partners of proprietary or partnershipfirm, are likely to find it rather difficult to get out of their business should they forsome reason wish to do so. This is because it is not always possible to find buyers foran entire business or even a part of business, just when one wishes to sell it.Similarly, it is not easy for someone with savings, especially with a small amount of savings, to readily find an appropriate business opportunity, or a part thereof, forinvestment. These problems would be even more magnified in largerproprietorships and partnerships. Nobody would like to invest in such partnershipsin the first place, since once invested, their savings would be very difficult to convertinto cash. And most people do have a lot of reasons, such as better investmentopportunity, marriage, education, death, health, and so on, for wanting to converttheir savings into cash. Clearly then, big enterprises will be able to raise capitalfrom the public at large, only if there were some mechanism by which the investorscould purchase or sell their share of the business as and when they wished to do so.This implies that ownership in business has to be “broken up” into a large numberof small units, such that each unit may be independently and easily bought and soldwithout hampering the business activity as such. Also, such breaking up of businessownership would help mobilize small savings in the economy into entrepreneurialventures.This end is achieved in a modern business through the mechanism of 
Shares
. A share represents the smallest recognized fraction of ownership in apublicly held business. Each such fraction of ownership is represented in the formof a certificate, known as the
share certificate
. The breaking up of the totalownership of a business into small fragments, each fragment represented by a sharecertificate, enables them to be easily bought and sold.The institution where this buying and selling of shares essentially takes placeis the
Stock Exchange
. In the absence of stock exchanges, i.e. institutions wheresmall chunks of businesses could be traded, there would be no modern business inthe form of publicly held companies. Today, owing to the stock exchanges, we donot have to be electronics company; we can be part owners of one company todayand another company tomorrow; we can be part owners in several companies at thesame time; we can be part owners in a company hundreds or thousands of rhilesaway: we can be all of these things, and none of them, should we for whatever
 
reason decide to convert all our ownership stake into cash at short notice. Thus, byenabling the convertibility of ownership in the product market into financial assets,namely shares, stock exchanges bring together buyers and sellers (or theirrepresentatives) of fractional ownerships of companies, much as buyers and sellersof vegetables come together in a vegetable market. And for that very reason,activities relating to stock exchanges (and its variations, as we shall see later) arealso appropriately enough, known as
Stock Market
or
Security Market.
Also, just as a vegetable market is distinguished by a specific locality and characteristicsof its own, mostly a stock exchange is also distinguished by a physical location andcharacteristics of its own. In fact, according to H.T. Parekh, the earliest location of the Bombay Stock Exchange, which for a long period was known as “The NativeShare and Stock Broker’s Association”, was probably under a tree around 1870.
CHARACTERISTICS OF STOCK EXCHANGES:
Traditionally, a stock exchange has been an association of individualmembers called member brokers (or simply members or brokers). Formed for theexpress purpose of regulating and facilitating the buying and selling of securities bythe public and institutions at large. A stock exchange in India operates with duerecognition from the government under the Securities & Contracts (Regulations)Act, 1956. The member brokers are essentially the middlemen, who carry out thedesired transactions in severities on behalf of the public (for a commission) or ontheir own behalf. New membership to a stock exchange is through election by theGoverning Board of that stock exchange.At present there are 21 stock exchanges in India (excluding NSE andOTCEI), the largest among them being the Bombay Stock Exchange (BSE). BSEalone accounts for over 80% of the total volume of transactions in shares. Typically,a stock exchange is governed by a board consisting of directors largely elected bythe member brokers, and a few nominated by the government. Governmentnominees include representatives of the Ministry of Finance, as well as some publicrepresentatives, who are expected to safeguard the public interest in the functioningof the exchanges. The board is headed by a President, who is an elected member,usually nominated by the government from among the elected members. TheExecutive Director, who is usually appointed by the stock exchange withgovernment approval, is the operational chief of the stock exchange, his duty is toensure that the day to day operations of the stock exchange are carried out inaccordance with the various rules and regulations governing its functioning. Theoverall development and regulation of the securities market has been entrusted tothe
Securities and Exchanges Board of India (SEBI)
by an act of Parliamentin 1992.All companies wishing to raise capital from the public are required to listtheir securities on at least one stock exchange. Thus, all ordinary shares, preferenceshares and debentures of publicly held companies are listed in stock exchanges.
 
While in the developed countries, brokers have along since graduated torendering a whole range of consulting and advisory services to their clients based ontheir own research and analysis, unfortunately, the profession of brokers in Indiahas remained a rather closed club, traditional and primitive. Their function haslargely remained limited to carrying out the transaction orders on behalf of theirclients (and often at prices far from satisfactory). In their role as sub-brokers and jobbers (a jobber is a broker’s broker, or one who specializes in specific securitiescatering to the needs of other brokers), their activities are even less organized andregulated.To be fair though, chare broking is not the only Indian institution in itsprimitiveness. It has plenty of company. The good news however is, things arebeginning to look up. Measures are a foot for professionalizing the service throughvarious means. For example, the BSE has set up a full-fledged training college witha view to developing the professional standards of its members as well as investors.Other institutiions like the various Indian Institutes of Management (IIM’s),Institute of Chartered Financial Analysts of India, Unit Trust of India etc. Are alsobeginning to play a useful part in professionalizing the discipline of investmentanalysis. Also there is an increasing trend to admit qualified membership to stock exchanges has already been introduced. So over a period of time, we can reasonablyhope that the service would get increasingly professional.
PRIMARY AND SECONDARY MARKETS:
A company cannot easily find takers for its securities (shares or debentures)from the public if they cannot subsequently trade these shares and debentures atwill. In other words, a security cannot have a good
primary market
unless it hasan active
secondary market
.Primary market comprises the companies making the security issues, and thepublic at large subscribing to them. Primary market is where a company makes itsfirst contact with the public at large in search of capital. Therefore, if one iswondering whether or not to invest in the new issue of a company, one iscontemplating whether or not to participate in the primary market.Secondary market comprises the buyers and sellers of shares and debenturessubsequent to the original issue. For example, having subscribed to the share ordebenture of a company, if one wishes to sell the same, it will be done in thesecondary market. Similarly, one could also buy the share or debenture of acompany from the secondary market (if the company is listed in the stocexchange), without having to wait for that company to come out with a new publicissue. Evidently, by their very role, stock exchanges are an important constitution of the capital market.

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