Stock market basics

The market where existing securities are traded is referred to as the secondary market or stock market. In a stock market, purchases and sales of securities whether of government or semi-government bodies or other public bodies and also shares and debentures issued by joint stock companies are effected. The securities of government are traded in the stock market as a separate component, called guilt edged market. Government securities are traded outside the trading wing in the form of over the counter sales or purchases. Another component of the stock market deals with trading in shares and debentures of limited companies.

II. Control over stock market

For the effective functioning of stock market proper control must be exercised. At present, control is exercised through the following three important processes:

Recognition of stock exchanges Stock exchanges are the important ingredient of the capital market. They are the citadel of capital and fortress of finance. They are the theatres of trading in securities and as such they assist and control the buying and selling of securities.

III. Services of stock exchanges

The stock market occupies a pivotal position in the financial system. It performs several economic functions and renders invaluable services to the investors, companies and to the economy as a whole.

They may be summarized as follows:

i. Liquidity and marketability of securities Stock exchanges provide liquidity to securities since securities can be converted into cash at any time according to the discretion of the investor by selling them at the listed prices. They facilitate buying and selling of securities at listed prices by providing continuous marketability to the investors in respect of securities they hold or intend to hold. Thus, they create a ready outlet for dealing in securities.

ii. Safety of funds Stock exchanges ensure safety of funds invested because they have to function under strict rules and regulations and the bye-laws are meant to ensure safety of investible funds. Over trading illegitimate speculation are prevented through carefully designed set of rules. This would strengthen the investor s confidence and promote larger investment.

iii. Supply of long term funds The securities traded in the stock market are negotiable and transferable in character and as such they can be transferred with minimum of formalities from one hand to another. So when a security is transacted, one investor is substituted by another, but the company is assured of long term availability of funds.

iv. Flow of capital of profitable ventures The profitability and popularity of companies are reflected in stock prices. The prices quoted indicate the relative profitability and performance of companies. Funds tend to be attracted towards securities of profitable companies and this facilitates the flow of capital into profitable channels.

v. Motivation for improved performance The performance of a company is reflected on the prices quoted in the stock market. These prices are more visible in the eyes of the public. Stock market provides room for this price quotation for those securities listed by it. This public exposure makes a company conscious of its status in the market and it acts as a motivation to improve its performance further.

vi. Promotion of investment Stock exchanges mobilizes the savings of the public and promotes investment through capital formation. But for these stock exchanges surplus funds available with individuals and institutions would not have gone for productive and remunerative ventures.

vii. Reflection of business cycle The changing business conditions in the economy are immediately reflected on the stock exchanges. Booms and depressions can be identified through the dealings in the stock exchanges and suitable monetary and fiscal policies can be taken by the government. Thus a stock market portrays the prevailing economic situation instantly to all concerned so that suitable actions can be taken.

viii. Marketing of new issues If the new issues are listed, they are readily acceptable to the public, since listing presupposes their evaluation by concerned stock exchange authorities. Costs of underwriting such issues would be less. Public response to such new issues would be relatively high. Thus a stock market helps in the marketing of new issues also.

ix. Miscellaneous services Stock exchange supplies securities of different kinds with different maturities and yields. It enables the investors to diversify their risks by a wider portfolio of investment. It also inculcates saving habits among the community and paves the way for capital formation. It guides the investors in choosing securities by supplying the daily quotation of listing securities and by disclosing the trends of dealings on the stock exchange. It enables companies and the government to raise resources by providing a ready market for their securities.

Listing of securities Listing of securities means that the securities are admitted for trading on a recognized stock exchange. Transactions in the securities of any company cannot be conducted on stock exchanges unless they are listed by them. Hence listing is the very basis of stock exchange operations. It is the green signal given to selected securities to get the trading privileges of the stock exchange concerned. Securities become eligible for trading only through listing. Listing is compulsory for those companies which intend to offer shares or debentures to the public for subscription by means of issuing a prospectus. The companies which have got their shares or debentures listed in one or more recognized stock exchanges must submit themselves to he various regulatory measures of the stock exchange concerned. They must maintain necessary books, documents and disclose any information which the stock exchange may call for.

Registration of brokers - A broker is none other than a commission agent who transacts business in securities on behalf of his clients who are non-members of a stock exchange. Thus, a non-member can purchase and sell securities only through a broker who is a member of the stock exchange. To deal in securities on recognized stock exchanges, the broker should register.

IV. Method of trading in a stock market

The stock market operations at floor level are highly technical in nature. Non-members are not permitted to enter into the stock market. Hence, various stages have to be completed in executing a transaction at a stock market.

The steps involved in the methods of trading have been given below :

a. Choice of a broker

b. Placement or order

c. Execution of orders

d. Preparation of contract notes

e. Settlement of transactions

Stock market basics

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