Business Project PDF

# Introduction A stock exchange is an important factor in the capital market. It is a secure place where trading is done systematically. Here, securities are bought and sold as per well-structured sales and regulations. Securities include debentures and shares issued by a public company, that is co...

# Introduction A stock exchange is an important factor in the capital market. It is a secure place where trading is done systematically. Here, securities are bought and sold as per well-structured sales and regulations. Securities include debentures and shares issued by a public company, that is correctly listed on the stock exchange. The secondary tier of the capital market is what we call the stock market or the stock exchange. The stock exchange is a virtual market where buyers and sellers trade in existing securities. It is a market hosted by an institute or any such government body where shares, stock, debentures, bonds, options, etc. are traded. A stock exchange is a meeting place for buyers and sellers. These can be brokers, agents, or individuals. The rate of demand and supply determine the price of the commodity. The stock exchange also facilitates the issue and redemption of financial securities and instruments inducing paying dividends and income. ## Objectives The objectives of a stock exchange can be summarized as follows: 1. **Facilitate Capital Formation:** Stock exchanges provide a platform for companies to raise capital by issuing shares to the public, allowing businesses to access funding. 2. **Provide Liquidity:** Stock exchanges offer a marketplace where investors can buy and sell securities and convert their investments into cash quickly and efficiently. 3. **Price Discovery:** Stock exchanges play a crucial role in determining the prices of securities through interaction of supply and demand. 4. **Fair and Transparent Trading:** Stock exchanges establish rules and regulations that promote fair practices and ensure transparency in transactions. 5. **Market Efficiency:** By providing a centralized market place with standardized rules and procedures, stock exchanges contribute to market efficiency. ## Major Stock Exchanges ### NYSE The (N.Y.S.E) New York Stock Exchange, located in Wall Street in New York City, is the largest in the world by market capitalization and has approximately \$3000 billion. Founded in 1792, it is renowned for its long history and the iconic trading floor where brokers conduct trade through a hybrid system of both physical and electronic trading. The NYSE is a home to many of the world's largest and most influential companies, including blue-chip stocks like Apple, Microsoft, Coca-Cola, etc. ### NASDAQ Nasdaq, established in 1971, is the second largest stock exchange in the world by market capitalization, which is approximately \$ 2000 billion, and is known for being the first electronic exchange. It is headquartered in New York City and primarily lists technology and growth-oriented companies including different giants like Amazon, Google (Alphabet) and Facebook (Meta). Nasdaq's fully electronic trading platform was revolutionary, enabling faster and more efficient trade executions. ### BSE The Bombay Stock Exchange (BSE), established in 1875, is Asia's oldest stock exchange. It has approximately \$3000 of market capitalization, and is one of the larger in India by market capitalization. Located in Bombay, Now Mumbai, it has over 5000 listed companies, making it one of the exchanges with the highest number of listed forms in the world. The BSE provides a transparent and effective market for trading in equity, debt instruments, derivatives, and mutual funds. The S&P BSE SENSEX, its benchmark index, is a key indicator of the Indian economy's performance. ### NSE The National Stock Exchange (NSE) of India, founded in 1992, is the leading stock exchange in India by trading volume and market capitalization and has approximately \$3000 billion. Also, based in Mumbai, the NSE introduced electronic trading to the Indian market which significantly increased transparency and efficiency. It offers a wide range of financial products, including equities, derivatives, and debt instruments. The NIFTY 50, its benchmark index, is widely used. ### LSE The London Stock Exchange (LSE) established in 1801, is one of the world's oldest and most prestigious stock exchanges, located in London. It meets a diverse array of global companies with a market capitalization of approximately \$4 trillion. The LSE operates various markets, including the Main Market and AIM, catering to smaller growing companies. The FTSE 100 index, which includes the 100 largest companies listed on the LSE, is a key indicator of the UK's economic health. Known for its extensive international reach, the LSE plays a significant role in facilitating cross-border trading. ## History The history of stock exchange in India begins in the 18th century with East India Company's trading of war securities. Corporate share trading started in 1830s in Bombay (Now Mumbai) under informal arrangements, evolving to formal organisation in 1875, with the establishment of the Native Share and Stockbrokers Association, later known as Bombay Stock Exchange (BSE). The BSE, located on Dalal Street since 1874, is Asia's oldest stock exchange and gained permanent recognition under the Securities Contract Regulation Act of 1956. Following the BSE, the Ahmedabad Stock Exchange (1894), Calcutta Stock Exchange (1908), and Madras Stock Exchange (1920) were established, focusing on shares of textile mills, plantations, and jute mills respectively. These early exchanges laid the groundwork for the development and formalization of India's capital markets, significantly contributing to the country's financial sector. ## Stock Exchanges in India 1. **Bombay Stock Exchange:** The Bombay Stock Exchange (BSE), founded in 1875, has been pivotal in India's financial evolution. It adapted to electronic trading with the launch of BSE ON-Line Trading (BOLT) in 1995, significantly boosting market efficiency and transparency. Introduction of the SENSEX in 1986, now known as the S&P BSE SENSEX, marked a milestone in benchmarking India's stock market performance. BSE has continually expanded its product offerings; included equity derivatives in 2000 and innovative indices like the BSE Tech in 2001, catering to diverse investor needs. 2. **National Stock Exchange:** Exchange established in 1992, the National Stock Exchange (NSE) revolutionized India's capital markets with its fully automated electronic trading system. It launched the benchmark NIFTY 50 index in 1996, providing a vital gauge of market performance. NSE's introduction of index options in 2001 and stock futures in the same year further deepened market participation. The NSE's technological innovations have set global standards, making it preferred exchange for both domestic and international investors. 3. **Other Exchanges:** Regional exchanges such as the Calcutta. Stock Exchange (Founded in 1908) and the Metropolita Stock Exchange (formerly MCX-SX) have played vital roles in factoring regional capital markets. These exchanges have adapted to market changes by diversifying their product offerings and enhancing their trading infrastructure. India International Exchange (India INX), established in Gujarat's 2017, has emerged as a hub for global investors offering a platform for trading in various asset classes further cementing India's position in the global financial arena. # Functions 1. **Financial Stability:** Stock exchanges contribute to financial stability by directing savings into productive investments, reducing reliance on debt, and fostering long-term wealth creation. 2. **Liquidity:** They ensure liquidity by providing a marketplace where securities can be easily bought and sold, allowing investors to quickly convert investments into cash, thus reducing risk and boosting confidence. 3. **Price Discovery:** Stock exchanges enable transparent price discovery through supply and demand dynamics, helping investors make informed decisions. 4. **Market Efficiency:** By offering a centralized, regulated platform, stock exchanges promote market efficiency, ensuring capital is allocated to its most productive use, thereby enhancing economic growth. 5. **Economic Indicator:** Stock exchange performance regulates and reflects the economic health and investor confidence, with market indices often correlating with economic cycles, indicating growth or contractions. # Importance 1. **Economic Growth:** Stock exchanges drive economic development by channelling savings into productive investments, fostering entrepreneurship and creating wealth. 2. **Investment Opportunities:** They offer a diverse range of investments: stocks, bonds, ETFs, and derivatives options to cater to different risk profiles and investment goals. 3. **Benchmark and Indices:** Stock exchanges provide benchmark indices (e.g., S&P BSE SENSEX, NIFTY NSE 50) that reflect market performance and economic health, aiding investment decisions. 4. **Global Integration:** They facilitate international investment and trade through platforms like International Financial Service Centre (IFSC) exchanges enhancing global competitiveness. 5. **Financial Institution:** Stock exchanges modify access to capital markets, enabling individuals and institutions of all sizes to participate in wealth creation and economic growth. 6. **Technological Advancements:** They promote technological innovation in financial markets, such as trading platforms, electronic order matching, high-frequency trading, and blockchain, improving market efficiency, transparency, and accessibility. 7. **Long Term Investments:** Stock exchanges encourage long-term investments, aligning with companies' capital needs for growth and development, contributing to financial stability, and sustainable economic expansion. # Key Terms 1. **Stocks and Shares** * **Stocks:** It represents ownership in a company and contributes a claim on the part of the company's assets and earnings. Stock can be classified into common stocks and preferred stocks. * **Shares:** Units of stock. When an investor buys shares, they are purchasing a portion of the company's equity. Shares are traded on stock exchanges. 2. **Bull & Bear Market:** * **Bull Market:** A period characterized by the rising stock prices and overall optimism in the market. Investors have confidence that the upward trend will continue, leading to increased buying activity. * **Bear Market:** A period where stock prices are falling, and widespread pessimism exists. Investors anticipate further declines and may sell off their stocks, leading to decreased buying. 3. **Initial Public Offering (IPO):** The process through which a private company offers shares to the public for the first time. This allows the company to raise capital from investors. After an IPO, the company's shares are listed and traded on a stock exchange. 4. **Index:** A statistical measure that represents the performance of a group of stocks. These provide a benchmark for the overall market. * **SENSEX:** The S&P BSE SENSEX, commonly referred to as the SENSEX, is a benchmark index of the Bombay Stock Exchange (BSE). It comprises 30 of the largest and most actively traded stocks on the BSE, reflecting the market's overall performance. * **NIFTY:** The NIFTY 50 is a benchmark index of the National Stock Exchange (NSE). It includes 50 of the largest and most liquid stocks on the NSE, providing a gauge of the market’s performance. 5. **Market Capitalization:** The total market value of a company's outstanding shares of stock. It is calculated by multiplying the current share price by the total number of outstanding shares. Market capitalization is used to categorize companies into different sizes such as: * **Large-Cap:** Companies with large marker capital, typically over \$10 billion. * **Mid-Cap:** Companies with a market capitalization between \$2 billion and \$10 billion. * **Small-Cap:** Companies with a market capitalization less than \$2 billion. These key terms and concepts are fundamental to understanding how stock exchanges operate and how investors engage with the market. # Trading Mechanism The trading mechanism on the stock exchange involves several steps, from placing an order to clearing and settlement. ## Trading Session 1. **Pre-Opening Session:** * **Timing:** 9:00 AM to 9:15 AM IST. * **Purpose:** The pre-opening session is divided into three sub-sessions: * **Order Entry Period** (9:00 AM to 9:08 AM): Investors can place, modify, or cancel orders. * **Order Matching Period** (9:00 AM to 9:12 AM): The stock exchange matches orders and determines the opening price. * **Buffer Period** (9:12 AM to 9:15 AM): Period to transition to regular trading session. 2. **Regular Trading Session:** * **Timing:** 9:15 AM to 3:30 PM IST. * **Purpose:** Continuous trading session where buy and sell orders are matched in real time. 3. **Post-Closing Session:** * **Timing:** 3:30 PM to 4:00 PM IST. * **Purpose:** Includes two parts: * **Closing Price Calculation:** (3:30 PM to 3:40 PM): Calculation of the closing price for the day. * **Post-Closing Trading:** (3:40 PM to 4:00 PM): Limited trading activity based on the closing price. ## Order Types 1. **Market Order:** An order to buy or sell a security immediately at the best price available. Used when immediate execution is more important than the price. 2. **Limit Order:** Order to buy or sell a security at a specific price or better. Used when price is more important.  3. **Stop Order:** Order to buy or sell a security once it reaches a specific price, known as the stop price. They are used to limit potential losses or to enter the market once a certain price level is reached. ## Trading Procedure 1. **Opening a Trading Account:** * **Choose a Broker:** Investors must choose a registered brokerage firm to open a trading account. The broker acts as an intermediary between the investor and the stock exchange. * **Documentation:** Complete the required documentation, including Know Your Customer (KYC) forms, providing proof of identity, address, and financial information. * **Linking with Demat Account:** A Demat (dematerialized) account is also needed to hold securities in electronic form. This account is connected with the trading account. 2. **Placing an Order** * **Market Order:** An order to buy or sell a security immediately at the best available current price. * **Limit Order:** An order to buy or sell a security once it reaches a particular price. Used to limit potential losses. * **Stop-Loss Order:** An order to buy or sell a security at a specific price or better. This is usually used when price is more important than immediate execution. 3. **Execution of Order:** * **Matching:** Orders are matched electronically through the stock exchange's trading system on a price-time priority. * **Confirmation:** Once the orders are executed, the investor receives a confirmation from the broker, detailing the transaction. ## Settlement Procedure 1. **Trading Confirmation (T+1 Day):** On the day following trade, the stock exchange confirms the trade details to the buyer and seller. This also includes the securities traded and price. 2. **Clearing:** * **Clearing House:** A clearing house (or clearing corporation) acts as an intermediary, ensuring that both the buyer and the seller fulfill their obligations. It guarantees the settlement of trades and manages counterparty risk. * **Netting:** The clearing house calculates the net obligations of each participant (buying and selling) to simplify the settlement process. 3. **Settlement (T+2 Day):** The settlement of trades in India follows a T+2 cycle, meaning that the transaction is settled in two business days after trade date. * **Delivery of Securities:** The seller's Demat account is debited and the buyer's account is credited with securities. * **Payment of Funds:** The buyer's account is debited with the purchase amount, and the seller's account is credited. 4. **Post Settlement:** * **Statement of Holdings:** Both parties receive updated statements of holdings from their respective depository participants, reflecting the changes due to the settlement. * **Reconciliation:** Investors should reconcile their trading account and Demat account statements to ensure accuracy. # SEBI SEBI stands for the Securities and Exchange Board of India. It is a statutory regulatory body established by the Government of India in 1992 to protect the interests of investors investing in the securities, along with regulating the securities market. SEBI's regulatory authority extends to various segments of the financial markets, including stock exchanges, mutual funds, portfolio managers, investment advisors, and other intermediaries. It plays a vital role in monitoring and regulating market activities, ensuring compliance with regulations, and making corrective measures in case of any violations. ## Objectives of SEBI 1. **Investor Protection:** Safeguarding investor interests through regulations and education. 2. **Prevention of Fraud:** Ensuring fair practices and preventing malpractices like insider trading and price rigging. 3. **Code of Conduct:** Developing ethical standards for financial intermediaries. 4. **Balanced Regulation:** Maintaining a balance between statutory and self-regulation. ## Functions of SEBI 1. **Protection Function:** * Prohibiting insider trading and price manipulation. * Promoting fair trading practices and financial education. 2. **Regulatory Function:** * Establishing rules and guidelines for corporations and intermediaries. * Regulating corporate takeovers and auditing stock exchanges. 3. **Developmental Function:** * Training intermediaries and promoting electronic trading. * To simplify underwriting processes and to reduce costs. ## Structure SEBI comprises the following members: 1. **The Chairman of the Board:** Appointed by the Central Government of India. 2. **One Board Member:** Appointed by the Central Bank, Reserve Bank of India (RBI). 3. **Two Board Members:** Appointed by the Union Finance Ministry. 4. **Five Board Members:** Appointed by the Central Government of India.