LESSON 15:

STOCK MARKET QUOTATIONS

Introduction
On any Stock Exchange, there are members who deal with client orders, institutional orders and in line business
(arbitrage operations). Some brokers specialize in the new issues market and some in badla financing. Some act as
Jobbers and market makers making two-way offers to buy and seel in selected shares. All members are permitted to
trade in the rading Ring or electronically with the mainframe computer. Each member is permitted to have
authorised assistants up to a maximum number as fixed by the Stock Exchange. The members do trading on their
own behalf or on behalf of their clients. If the member acts as a broker, he is doing retail business or purchase and
sale transactions for the customers. If a member is doing wholesale business, offering both purchase and sale prices
(bid and offer) to the other member brokers then he is called a jobber. Both brokers and jobbers or market makers
are an essential part of the stock market operations. The purchase and sale transactions in the market relate to
dealigns in securities listed on the Stock Exchange, namely, Equity Shares, Preference Shares, Debentures (both
convertible and non-convertible), Gilt-edged Securities and semi-Government bonds. Listing of securities of the
corporate sector is done in accordance with the regulations embodied in the Securities Contracts (Regulation) Act,
1956 and the Securities Contracts (Regulation) Rules, 1957 and the Byelaws of the Stock Exchange. The securities
of the Centre, State asnd semi- Government bodies are listed for trading automatically after they are issued to the
public without any listing fees and procedure.

Speciied and Non-Specified Groups

The listed securities of the companies are classified into a specified group and non-specified group (cash list) on the
basis of certain criteria. Those included in the specified list should be fully paid-up equity shares listed already on
the Exchange for at least three yeas on the cash list and the company’s paid-up equity capital should be above Rs. 10
crores. The shares should have been actively traded while on the cash list. The equity shares should be widely
disbursed and a large volume of shares is available with the public for trading. The company should have a record of
good earnings and dividends over the past few years before inclusion in the specified list. Speculation is permitted
only in the specified list. Trading is genuine, if delivery is taken or given and speculative if no delivery is involved.
Those which are first listed will be kept in Nonspecified or Cash group. In addition to specified (A group) and Non-
specified groups (B group) split into B1 and B2 groups, based on the volume of trade turn over and the good
fundamentals of the company there is a category of permitted securities. These are not listed on that exchange but
listed on some other exchange and permitted to be traded here. There is, however, no such permitted list on BSE.

Customer’s Orders
The investor can place an order by telegram, telephone, letter or in person. The order may be for the purchase or sale
of a specified number of shares of a company at a specified rate or range of prices. The member broker is a
custodian for the shares/securities of his client till they are sold or delivered. The order to buy or sell may be given
for a fixed price or at a maximum or minimum price range which is also called a limit order. Some others are ‘At
Best’ or ‘At the Market price.’ The member broker has to execute the other at the best obtainable price in the market
on a specified date Some orders may be ‘Immediate’ or ‘Cancelled’, which signifies that the broker has to buy or
sell at the specified price immediately such as sell 100 Colgate at Rs. 430 and if the price in the market is
unfavorable, the order is cancelled. Some orders are open orders, which can be executed at any time within a range
or prices while others are discretionary leaving the discretion to the broker. After receiving the orders, the member
enters these orders in his books and then purchase and sale orders are distributed among his authorized assistants to
handle them separately in the specified list, non-specified list and so odd lots. The member would have three
alternatives in executing the orders. He may go to the trading ring to buy or sell the required shares. Alternatively,
the member can set off matching orders of purchase and sale of different clients of his own or purchase or sales from
out of his own stock of portfolio held by him. But all these orders have to be executed at the prevailing market prices
on that day. In electronic trading, these orders are fed to
the computer and order matching is done electronically and confirmation or rejection comes automatically.

Trading Ring
Trading on the Stock Exchange used to be officially done in the trading ring for three hours from 11.30 a.m. to 2.30
p.m. or 12 noon to 3 p.m. Under electronic trading, hours are extended from 10 a.m. to 4 p.m.. from Monday to
Friday. Trading before or after official hours is called kerb trading. In the trading ring, space is provided separately
for specified and non-specified sections. The members or their authorized assistants have to wear a badge or carry
with them identity cards given by the Exchange to enter the trading ring. They carry a sadua block book, or
confirmation memos, duly uthorised by the Exchange and carry a pen with them. On the trading ring, there are
jobbers in some exchanges who do wholesale business of purchase and sale, giving twoway quotations of bid and
offer for each share. The jobber may specialize is some scrips and stand at a specified place in the ring indicating the
share or shares that he is trading in. The authorised assistant approaches one or more jobbers specialising in the
scrips that he wishes to buy or sell and make the best possible bagain with the jobbers. When the deal is struck, both
jobber and broker make a note in their sauda block books of the transaction, or enter into confirmation memos. In
Exchanges where electronic trading takes place, as in OTCEI or NSE, as also in BSE there is no need for trading
ring. Some members are both jobbers and brokers. Each jobber tries to purchase and sell those shares he is
specialising in such quantities that he can match as far as possible the purchase and sales in each share by the end of
the day. According to the supply and demand position of the shares, the prices of purchase and sale would vary in
the market and the jobber would do his best to match his purchase and sales and the margin between the purchase
and sale prices would be his profit.

Block Book (or the Sauda Book)

After each order is executed, suitable entries are made in the concerned member’s Block Book (or pass confirmation
memos). This is a book of transactions executed on the floor and appropriate entries are made after every deal to
record the number of shares traded, the prices of the purchase/sale, and the name or code number of the other
member through whom the deal was finalised. Each page of the sauda book or the block book taken to the floor of
the Stock Exchange should be duly autorised by the Stock Exchange autorities. Under electronic trading the
computer software is designed to give all the returns to be submitted to Stock Exchange and the accounts to be
maintained by the broker himself. It is mandatory to submit a copy of the Sauda Sheets or computerised sheets
(separate for specified and non-specified) after 4.00 p.m. every evening to the Stock Exchange. If the Stock
Exchange authorities fund untallied transactions (i.e., if some details do not match with what the counter-member
has recorded), they will issue a memo and the member is required to attend to it immediately and clear the
objections raised therein and return the memo.

Contract Note
From the sadua block book (where the transactions are sketchily written up), the details are transferred to the sauda
book (which gives complete details). From the sauda book the contract notes are drawn up. It is important to ensure
that the contract note is written up on the day of the deail and posted to the client. This is a proof that the contract
was executed on that day not not on any other day since prices fluctuate every day. Besides, under Article 43 (b) or
(bb) of Schedule 1 of the Indian Stamp Act, the broker must affix a revenue stamp (based on the value of the
contracted transaction or face value whichever is higher).

Drawing Up and Bills

For A Group : Both sale and purchase bills are prepared along with the contract not and it is posted on the same day
or the next day. For B Group : Bills are prepared only after receipt of delivery order/paymentorder. This, in a
purchase transaction, once the shares are delivered to the client after the cliet effects payment for the purchase and
pays the stamp fees for transfer; a bill is made out giving the total cost of purchase; including other expenses
incurred by the broker in the price itself. Now all these have to be shown separately from brokerage and price.

Cum and Ex-dividend

Sometimes, shares are purchased cum-dividend (or sold cumdividend) but delivery is made/given ex-dividend. This
means that though the buyer is entitled to the dividend, he gets the shares only after book closure for dividend
payment. The dividend thus goes to the seller while it rightly belongs to the buyer. The price paid to the seller is
adjustd for full divident. Thus, when the bill is made out, the broker has to credit the buyer for the dividend and
debit him only with charges for stamp fees and other expenses net of dividend. Similar situations arise in the case of
shares bought com-bonus/cumrights, but where the delivery is effected ex-bonus/ex-rights. Further, for tax purposes,
the document that the ITO relies on is not the contract note but the bill which gives the total consideration of the
transaction.

Settlement in Specified List

Settlement for scrips purchased and sold in the specified list is different from those of the non-specified list because
in the cat of the former, speculative transactions are allowed to be carried forward to the next period. Stock
Exchanges allow speculative trading in shares listed in the forward list, allowing thereby for short-selling and long-
buying of shares. All transactions on the specified list are taken stock on the badla day, once a week, being every
Friday which is now on a weekly basis. The mechanics of these badla transactions are quite intricate, though pretty
logical. In any settlement period – a fortnight, now a week - (effectively 5 trading days), there would have been a
certain amount of genuine buying/selling as well as speculative buying/selling. The day on which such transactions
are posted for settlement or carry forward is called the “Badla Day.” All those contracts which are not be carried
over are settled between the members by effecting deliveries and payment before the next badla day. Two things
may happen on the badla day as far as speculative transactions concerned :
1. They are carried forward from one settlement period to the next by drawing up a fresh set of contract notes to give
effect to the carry forward.
2. Either an interest called Seedha Badla is paid to the seller by the buyer or charges as Undha Badla is paid by the
seller to the buyer depending on the net overbought or oversold position in any scrip.

To effect steps (1) and (2) stated above, the Stock Exchange authorities fix the Havala Rate and, the Carry Forward
Margin and the Badla Charges are determined by the market forces. Havala Rate is the price at which each scrip in
the specified list can be carried forward, also called the Standard Rate or the Making-up price. The rate is normally
based on the closing price of the scrip on the day prior to the badla day, i.e. based on the closign prices on the last
trading day. If the Stock Exchange authorities wish to impounda part of the profit by bulls or bars (i.e, the price
difference between the contracted rate and the havala rate) as a result of excessive speculative activity in the scrip
betwen the two settlement periods, they can decide to fix a havala rate which in their opinion is the ost
representative. The Carry-Forward Margin : This margin is fixed by the Stock Exchange authorities on all scrips,
with a right to levy margins on those which are subject to heavy speculative activity. Different charges are payable
by the buyers and the sellers. The Havala Sheet, which is published by the Stock Exchange, lists the MARGIN
requirements to be paid by the bulls/bears on each scrip, as also the carry-forward rates for both (after adjusting the
margin with the havala rate). The Badla Charges (also known as Vyaj Badla) : The carry forward charges or interest
is to be paid by the buyer or seller in each scrip depending on whether the net position in that scrip is overbrought or
oversold. Long buyers are normally more than short sellers. Short-selling without having shares is highly speculative
but is rewarded by badla charges paid to him by the long buyers for squaring up their position. But SEBI ordered the
withdrawal of badla payment to short-sellers in April 2000.

Badla Charges
Undha Badla charges are payable when there is more “speculative selling” than “speculative buying” in any scrip,
i.e. when the scrip is oversold. In effect, this means that there are more buyers willing to take delivery than there are
shares available for delivery. It is generally found that there is always more “speculative buying” than “speculative
selling” in the Stock Exchanges based on human psychology. Two possible reasons could be given for this situation.
First, It is more difficult for a person to comprehend that he can first sell what he does not own and buy it back at a
lower rate later and make a profit than to comprehend that he can buy something today and sell it later at a profit.
The second reason is that if the floating stock in a scrip is limited and thee is excessive short-selling, then the bull
operators can capitalise on this technical position and demand delivery or demand extortionate interest charges at the
settlement. The bear operator is then caught as there is no floating stock to deliver and he than has to purchase scrips
from the market or borrow them from a financier to delivery. He may then have to pay a heavy price for these scrips.
This proves a deterrent to excessive short selling. In this case, it is possible that shares due for delivery can be
auctioned in the market and delivery secured and the amount involved is debited to the member due to deliver but
failed to do so. On the other hand, a bull operator who is long or overbought can always borrow money or take
delivery of scrips if he finds that the badla financier is charging exorbitant interest rates. Money is easier to obtain
than shares. Badla paid for purchases carried forward is called Seedha Badla. In liew of Badla, the NSE has
introduced Automatic tending and borrowing mechanism in respect of shares to facilitate short selling and yet give
and take deliveries at the time of settlement. Though the badla rates are fixed by the market forces of demand and
supply of funds and scrips, the Stock Exchange has the authority to intervene if they think that the rates are
unreasonable, and could as a result destabilise the market.

Factors Influencing Badla Rates

The badla charges or the amount of interest charges (also called Vyaj Badla) tht are contracted to be paid as a result
of carrying forward a transaction are based on several factors, namely :
a. The total amount of badla finance available in the market.
b. The technical position of the market i.e., the extent to which it is overhead in terms of speculative buying, and
hence the total volume and value of shares overall which have to be financed.
c. The total amount of badla finance available for a particular scrip - some scrips are not favored by the financiers
due to
their poor liquidity - and for several other reasons.
d. The overall money market interest rates.
e. The psychological state of the market.

Carry Forward Facilities

If the buyers/sellers wish to carry forward their transactions from one settlement period to the next settlement
period, they draw up a fresh set of contract notes to give effect to the carry forward of the purchase/sale at rates
which reflect the havala rate, the margin and the badla charges.

Example 1
Assume that a broker has transacted a sale order at the rate of Rs. 700 per share and that the standard rate for the
share is fixed at Rs. 730, the carry forward margin payable is Rs. 40 per share for the seller, and that the badla
charge is fixed at Rs. 4 per share. So, a contactor note would already have been drawn up, stating - Sold N number
of shares at Rs. 700 (minus brokerage) per share. The seller then has a choice of either giving delivery or carrying
the transaction forward to the next settlement period.i. If he wants to give delivery, then the settlement will be made
at the rate agreed upon, being Rs 700 (less brokerage) per share.

ii. If he carries it forward :

a. A new contract will be drawn up as having purchases shares at Rs.770 (Havala Rate Rs. 730 + Margin Rs. 40 +
brokerage) per share.
b. A new contract will then be made on the same day as having sold N shares at Rs. 774 (the rate on the purchase
contract Rs. 770 + badla charges receivable Rs.
4) per share.

Note : If the Havala Rate is less than the selling rate of Rs. 700, say Rs. 680, then the rates on the contract in (a) will
be Rs. 720 (Rs. 680 + Rs. 40) and the rate on the contract in (b) will be Rs. 724.

Example 2
Suppose a broker has executed a purchase order of Number of shares at Rs. 700 and the carry forward margin on the
buyer is also Rs.40 and all others area as in the above example. Therefore, a contract note effecting this purchase
would have already been drawn up as having bought at Rs.700 (plus brokerage). The buyer then has a choice of
either taking delivery or carrying it forward:
i. If he wants to take delivery, then the settlement will be made at Rs.700 (plus brokerage) per share.
ii. If he wants to carry it forward:

a. A new contract is drawn up as having sold N shares at Rs. 690 (Standard rate Rs. 730 - Margin payable Rs. 40)
adjusted for Brokerage per share.

b. A new contract will then be made on the first day of the next settlement period as having bought N shars at Rs.
694
(the rate of the sale above Rs. 690 + badla payable Rs. 4).

Note : As in the above note, if the Standard Rate is (say) Rs. 680, then the rates in the above contracts will be Rs.
640 and Rs. 644 respectively. Therefore, for carrying forward a contract to the next settlement, the following steps
have to be taken on the Badla day :
1. Draw up a contract squaring up the position. The price in this contract note will be the respective carry forward
rates
specified on the Havala Sheet.

2. Draw up a fresh contract maintaining the position which was to be carried forward, the rate being the one
indicated in
(1) above + the badla charges.

Book Closure Badla Financing (BCBF)

Such financing differs from the normal fortnighly financing as financiers take interest for a month as against for a
fortnight or a week in the normal badla financing. BCBF is for a one-month period (unless otherwise stated),
because it takes 14 days to get delivery of scrips purchased from the clearing house and the buyer is given a further
14 days to lodge the shares for transfer. The share becomes ex-right one month before the book closure day, i.e., on
the book closure badla day. When the company announces the book closure date, the Stock Exchange accordingly
fixes a suitable badla day, which is about a month prior to this date, as the book closure badla day. BCBD occurs at
the time of book closure for dividends, bonus issues, rights issues etc. BCBF money costs more due to the following
reasons :

1. The longer holding period (and hence the greater the risk) and the fact the shares have to be lodged for transfer.
Besides, financiers also charge for stamp fees on transfer and the cost of materials and registered post charges.
2. The financier who takes delivery of the shares on behalf of the buyer has to lodge the shares for transfer to his
name,
and hence the identity of the new financier, and thus such financing can be done with only the “tax paid” money.

Settlement in Non Specified Shares

All business transacted in any week, between a Monday and Friday of the week is settled on the next Saturday (not
the one immediately following). The price at which they are actually bought or sold is considered for the settlement.
Delivery is made on the following Monday. If for some reason the settlement is not made within three settlement
periods, then the difference in the price can be claimed by the buyer. Here the buyer has an advantage in that if the
price were to go up within this stipulated time and settlement has not been made (i.e., he has not received delivery),
then he can claim the excess amount, or he can demand delivery of the shares. Settlement and delivery in respect of
specified shares take place as between the members and through the clearing house. Both delivery of shares and
payment or receipt of money would be through the clearing. But in the case of non-specified shares is done directly
as between the members while payments and receipts are effected through the clearing.

After the Badla day

All deliveries of shares/payments arising outof the badla day adjustments have to be SETTLED with respective
deliveries and payments before the next badla day. The transactions contracted by the member in respect of
specified shares are entered into the “Settlement Register.” The transactions executed during the settlement period
with the clients/other members are balanced in this register and the outstanding transactions are adjusted at the
“Carry Forward” or the “Havala” rates on the badla day. Therafter, the balance in the client’s accounts are posted to
the clients’ ledger. In the case of non-specified shares, transactions are directly entered in teh clients’ ledger from
the Sauda Book.

Kinds of Delivery
A contract which has been executed on behalf of a client or on the member’s own account, culminates in the
delivery/receipt of payment for shares. Deliveries of securities can be effected in four ways :
1. Hand Delivery
2. Spot Delivery
3. Special Delivery
4. Delivery for clearing

Hand Delivery
Delivery and payment should be completed on the date stipulated when entering into the bargain, which shall not be
more than 14 days following the date of the contract.

Spot Delivery
These transactions are to be settled by delivery and payment on the date of the contract or on the next day. For
completion of the contract, the actual period for the despatch of the securities or remittance of money through post is
excluded in the computation when the parties to the contract reside at different places.

Special Delivery
Delivery and paymetn made any time exceeding 14 days, but not exceeding 2 monts, following the date of the
contract as may be stipulated when entering into the bargain and permitted by the Governing Board or the President.
The three types of transactions described above, namely, spot delivery, hand delivery and special delivery, are called
“spot” or “ready transactions.” They must be settled by delivery asnd payment and cannot be carried forward.

Delivery for Clearing

All transactions in securities in the specified list are effected only through the clearing house. The securities for
delivery will be delivered to the buyer within a week and the seller receives all members dues within the same time
from the clearing house on the respective “pay-in” and “pay-out” days. The function of the clearing house is
confined to the receipt and delivery of securities and receiving payments from members for their sales. In the event
of a member defaulting on his liability to the clearing house, the responsibility for recovering the amount due from
the member on account of his purchases, devolves on the other member with whom the transaction was entered into.
The clearing house does not come into the picture. This custom forces each member to examine the financial
soundness and integrity of the other member before concluding a transaction. In the case of ‘B’ Group Shares,
delivery of shares is effected directly between members.

Present Position of BADLA

The badla trade as banned in March 1994. Subsequently, trade volumes declined and liquidity was impaired. The
Government had second thoughts and a Committee on Review of Badla System was appointed in Feb. 1995, under
the Chairmanship of G.S. Patel.\ After the G.S. Patel Committee submitted its report in March 1995, there was a
long delay in the acceptance of their recommendations. The SEBI gave some proposals and the Stock Exchanges
gave counter proposals but finally on October 5, 1995, the SEBI has announced the acceptance of the Committee’s
recommendations in full.
The recommendations accepted are as follows :
i. Carry forward of deals are permitted subject to more rigorous scrutiny and Transparency.
ii. A flat margin of 15% will be recovered from brokers for carry forward deals and on a marked to market
basis every week. Margins will depend on the market prices from time to time, adjusted on a weekly basis.
iii. A capital adequancy norm of 3% for individual brokers and6% for corporates has been stipulated. Brokers
are allowed self certificaton, in place of audit, regarding their deals carried forward. The Stock Exchange
or SEBI would however check on those self certified statements.
iv. Mandatory squaring up is imposed for all transactions carried forward with in 90 days.
v. The stock Exchanges will strengthen their monitoring system and review the position of capital adequacy
norms of brokers in badla deals, so as to protect the invest or interests. The stipulated of publishing the
carry forward position broker wise, scrip wise, before the start of each badla session was retracted. This
leads to total acceptance of G.S. Patel Committee recommendation and the system is now being
implemented.

J.S. Varma Committee (July 1997)

This committee recommended the Modified Carry Forward System. (HCFS), which consists of the following
features :
1. Elimination of the limit of 90 days for carry forward syste,
2. Elimination of settlement only be delivery after 75 days.
3. Removal of the limit of Rs. 10 crores on the financier funding.
4. The clearing house should have an insurance policy, covering the aggregate value of shares lying with them.
5. Abolition of the twin track system of seggregating carry forward trades and delivery trades.
6. A uniform margin of 10% of the gross position (instead of 15% as before) with a daily marking to market prices.
7. In case of Vyaj Badla, the financier should be allowed to take custody of the shares withsafeguards. The shares
lent by badla financiers will continue to be deposited with the clearing house.
8. Capital adequcy and other prudential safeguards should be strictly enforced.
9. Scrips chosen for carry foward should have sufficient floating stock.
10. Exchanges should strengthen the maintaining and suveillance system to enforce the rules on the carry forward
trading.

Dhanuka Committee Report

This Committee set up by SEBI to review the securities related Acts and Regulations reported in October 1997. The
committee recommended that all SROs like AMBI, AMFI etc., should register with the SEBI. All market players
and intermediaries should have their own respective Associations which are registered and controlled by SEBI. The
schmes of M.F., promoted by UTI should be brough with in the purview of SEBI. The SEBI Act should be extended
to UTI, and will prevail over any provision in UTI Act. The committe also recommended that SEBI should be
allowed to confiscate and impound all ill-gotten gains of any players and intermediaries in the stock and capital
markets.

Recent Reforms of Stock Exchanges

Disclosures and Transparency of listed companies and their code of corporate governance are enforced by stock
Exchange which have undergone major structural reforms. Their surveillance systems have improved and their
Boards are now broad based. The trading cycle is made uniformly for 5 days. 23 Stock Exchanges have
approximately 8,000 electronic trading terminals all over the country. The Stock Exchanges have set up Trade
guarantee funds to ensure smooth trading and reduce counter party risk. Their regulation of members has improved
as also of trading, settlement and clearing Demat form of trading electronically has increased volumes and shortened
the settlement and clearance period. Compulsory rolling settlement has replaced badla trading in the case of most
stocks. Listing and Corporate governance rules are more strictly eforced. Insider trading regulations and other
malpractices are subject to greater scrutiny by Stock Exchanges and SEBI.

Trading in the St Mkt.

Pattern of Trading
Trading in the stock market takes place under three sections (Bombay Stock Exchange):
i. Group (A) - Specified shares.
ii. Group B1 and B2 - Non-specified shares or Cash Shares.
iii. Group (C) - Odd lots.
Under Group (A), only those actively traded (around 150 on the BSE) are included. The criteria for listing in
specified group has been dealth with in an earlier chapter. The rest of the listed securities are placed in Group (B) of
which those well traded are put in group B1. There are 8,000 scrips in total and 6,000 companies quoted on the BSE
of which 90% are equities. Out of these equity shares, only about 800 companies are traded on a daily basis. The
trading in the rest is nil or negligible. Under Group (C), only odd lots (tradable lots being 5,50 to 100, depending
upon the face valye), are traded to provide liquidity to them once in a week on the BSE. The standard face value of
Rs. 10 was given up in favour of any face value of Rs. 1 and above in 1990-00. The permitted securities are those
that are not listed on the Exchange, but are permitted to be traded on this Exchange, also called foreign securities as
they are listed on other stock exchanges in India. On BSE, there are no permitted securities, under their Byelaws 25
& 26 of Rules & Byelaws. The securities traded may be corporate securities, semi-government securities or public
sector bonds. The latter are not traded on the trading floor but over the counter through telephone, telex, etc., as
between brokers, RBI, etc. The instruments of trading are equity shares, preference shares, debentures, CCPs, PSU
bonds and government securities. The two main stock market indicators are price and quantity of shares traded. The
indirect market indicators are the velocity of price changes or spread of market prices (volatility) and the intensity of
trading per hour, and the number of advances and declines in prices etc.

Barring the equity which have a variable dividend, the other securities have a return fixed and trading in them is
restricted. In fact, there is not much trading in preference shares and PSU bonds. Only in respect of equity shars and
that too of major companies, there is trading of any worthwhile magnitude. The equity shares are owernship capital
enjoying tax exemption for dividend income in the hands of individual investor from 1997-98 and have a good
marketability. There is also an exemption up to a limit in respect of investment in new issues of specified
companies. Investment in shares, securities etc. is also exempt from wealth tax. The market, therefore, provides
good liquidity to only equity shares and that too of a limited number of companies. Trading in debt instruments is
more concentrated on NSE. One indicator of the market trading is the turnover of shares in volume and value. In
1996, the monthly market turnover is around Rs. 11,080 crores with average daily turnover of arounds Rs. 500-800
crores on the BSE which spurted upto Rs. 1300 crores per day dye to on line trading system, on BSE and NSE in
1998-99 and further to Rs. 2000 crores per day in 2000-01. This rise in turn over is made possible due to expansion
of BOLT (on line trading) to 500 cities by June 2000. Nearly 80% of trading is confined to the specified group. (A
Group).

‘Z’ Group in Bombay Stock Exchange

In July 1999, the B.S.E. has introduced a new class of scrips, namely ‘Z’ group, which Comprises of companies, not
complying with clauses of the listing agreement and are not redressing the grievances of investors. This is akind of
black
listed companies which are erring presistently in following the Rules and Regulations of the listing agreement or not
paying the listing fees, not calling for meetings and delay in announcements and in complying with investor
complaints. If the pending complaints are increasing and the company is not responding, the BSE authorities have
been shifting such
companies from B2 group to ‘Z’ group in order to caution the prospective investors, against such companies. Before
shifting such copanies to ‘Z’ group, the Exchange sends them notices advising remedial action by the companies and
if they refused to comply and not respond to such notices, they are shifted to ‘Z’ group. More than 300 companies
are now in ‘Z’ group and the companies in this group are increased from time to time depending upon the
complaints against such erring companies. Unfortunately, this measure did not help to correct the erring companies,
nor did it shift away the investor interest in them. Many investors are placing orders for scrips in this group, despite
such warning signals, from The Stock Exchange authorities. The ‘Z’ group is thus a group of black listed erring
companies which should give a red signal to any investor who want to invest in them. Another indicator of the
market trading is the price in terms of individual scrips and for groups of securities in the form of indices. The BSE
publishes two types of series - Sensitive series of 30 most actively traded scrips and secondly. National series of 100
actively traded scrips oin the major stock exchanges of Mumbai Ahmadabad, Delhi, Calcutta and “Chennai. Fig.
24.1 shows the price trends in terms of B.S.E. Sensex over a period of 10 years. The graph shows that over the
period 1991 to 2000 the price rise has shown an increase nearly 8 times indicating the degree of appreciation of
capital in the market. The appreciation reflects the corporate performance, on the one hand, and increase in liquidity
in the economy, on the other.1 The rise in prices of shares has provided a hedge against inflation, if these prices are
considered for a longer period of 5 to 10 years. Thus, the market is providing liquidity in major shares and also
acting as a hedge against inflation. Another important function provided by the market is the increase in the capital
raised from the public in terms of new issues and the volume of securities to be traded in the market. About Rs.
26,500 crores are raised from the capital market in 1994-95 as against the Eighty Plan Projection for an amount of
Rs. 13,000 perannum over the period 1992-97. The fresh capital listed on the stock exchanges has also increased
accordingly. The amount raised through all methods, including private placement by Private Corporate Sector was
Rs. 30,000 crores in 2000-01 (RBI Annual Report)
.
Trading and Settlement
Speculative Traders Vs. Ganuine Investors
The investors in the stock market can be classified as genuine investors and speculative investors. The former take
delivery of shares and give delivery with no intention to deal in carryforward business. The latter, however, do not
give or take delivery of shares but only deal in differences in purchase and sale prices. Even if they take delivery,
their intention is to make gain on differences between purchase and sale prices. Short-term gains are the motive of
the genuine investors. Any genuine investor can have short-term gains of a few months when he buys and sells
along with delivery. The essential difference between these two classes lies in the intention to take and give delivery
of shares or to just carry forward and to gain in differences.

Types of Sepculators
On the stock markets, there are various classes of brokers, depending on their activities and specialisation.
Essentially, a
broker is an intermediary between buyers and sellers of securities. His clients may be individuals, institutions like
companies, trusts, charities, etc., banks and financial institutions (including mutual funds). Some of these clients
may be
speculators also doing business of carry forward and dealing in differences in prices. Secondly, there are jobbers or
Taravaniwallas who are wholesalers doing both buying and selling in selected scrips. They give both bid and offer
prices for the scrips they trade in. They are like market-makers in foreign markets. Thirdly, there are badliwallas
financing the carryforward transactions and lending securities when necessary. Such carry-forward or badli
transactions are facilitated by blank transfer of T.D.s. with shares. These blank transfers are transfers without any
insertion on them, the names of the transferees and without any need for payment of stamp duty, etc. On the stock
exchange, there are two main categories of speculators, namely, bulls and bears. Bulls are Tejiwallas who buy sahres
in expectation of selling at higher prices. Beas are known as Mandiwallas who sell securities in expectation of a fall
in prices and buying at a later date. Stags are those members who neither buy nor sell but apply for subscription to
new issues expecting to sell them at a higher price later when these issues are quoted on the stock exchange.

Activities of Brokers
In addition to the above classes of brokers who are members of the stock exchange, there are a few who act as
arbitrageurs as between two or moe stock exchanges. Thus, these members buy in one market and sell in another
market to take advantage of the price differences in the same scrip as between different markets. Some brokers
specialise in dealing in the specified Group (A) which are speculative scrips and have carry forward facility (badla).
There are others who only deal in non-specified Group (B) where delivery of shares is given and taken. There are a
few dealers who also specialise in odd lots which are not in the marketable lots so as to facilitate buying and selling
in them for investors. Some Stock Exchanges hold separate trading sessions for odd lots on specific days when the
brokers put through their transactions. Marketable lots are shares of 100 or 50, when the share’s face value is Rs. 10;
and 5 when the shares are of face value of Rs. 100 and Rs. 50. Since 1999, SEBI has allowed issues without fixed
face value such as Rs. 10 or Rs. 100. The relevance of odd lots has disappeared when physical certificates are
replaced by Demat form of them. There is a separate category of brokers dealing only in new issues, underwriting,
marketing, lead management and even merchant banking etc. Besides, many brokers also undertake the business or
mobilising fixed deposits for companies. Some activities akin to money market operations are undertaken by brokers
like arranging intercorporate investments, discounting of commercial bills of exchange or trading in UTI units or
PSU Bonds etc. Some brokers specialise in government securities market, which is a part of the stock market
operations. The goverment and semi-government securities and government guaranteed bonds are quoted on the
stock exchanges. Their trading does not take place in the trading ring but over the counter of the brokers vis-a-vis
the investing banks, financial institutions or other brokers. As referred to earlier, many brokers undertake activities
in the primary market in addition to the secondary market. These two markets are complementary and brokers
having activities in both the markets are at an advantage in that they can secure contracts with companies, lead
banks, financial institutions, etc. They can secure shares of these companies underwritten or marketed by them for
keeping as their inventories. In this market, the brokers act mainly as marketing by them for keeping as their
inventories. In this market, the brokers act mainly as marketing agents sometimes as underwriters, issue managers,
lead managers, merchant bankers, consultants and even as registrars. The most common activity undertaken by
brokers in this respect is consultancy and advice to investors, be they individual clients or institutional clients. As a
follow-up of this, they also provide the services of portfolio management to big clients, institutions and NRIs. The
investment consultancy firms established by brokers specialize in this portfolio management.
Thus, the activities of brokers can be set out as follows :

In the Primary Market :

To act as underwriter-broker for new issue marketing - lead manager - issue manager - merchant
banker-portfolio manager - adviser/consultant etc.
In the Secondary Market :
To act as dealer, broker, jobber, etc. in the trading ring, bodla financier for carry forward business - arbitrageur
buying and selling as betweem the different markets, as in Mumbai and Delhi - dealer in government securities,
bonds, etc. adviser, consultant and portfolio manager, etc.

Alied Service :
Investor services like home delivery of shares, arranging for transfer of shares, safe custody of shares, etc. dealing in
inter-corporate investment to act as broker for fixed deposits of companies, to operate in the money market, PSU
bonds, UTI units, Mutual Fund Schemes, etc.

Broker’s Charges
Except to the charitable trust, the broker charges brokerage to all clients, after effecting the purchase or sale and at
the time of passing the contract note. The brokerage, which may range from 0.5 to 2.5%, is inch deed in the price
charged but not separately shown. The SEBI has now insisted on their showing the brokerage separately. Even a
smaller brokerage may be charged depending on the volume of business and frequency of dealings put through for
the client. Generally, the prices charged by the broker are higher than those officially quoted in the quotation list.
This is because the broker includes the brokerage in the price and in the price band prevailing in the market on any
day, the higher price is used for sale to the client and lower one for purchase as he has to buy from and sell to the
jobber, who quotes in the reverse order, namely, buy low and sell high. This is the general practice of brokers, and
this can be mistaken by the clients as if the broker is overcharging them. Brokers are also collecting from clients the
service tax of 5% on the brokerage income which they pay to Government and which is shown separately in the
Contract Note.

Delivery/Payment
The broker takes the cheque for purchase first and delivers the shares later in a purchase deal. He pays by cheque
later but takes delivery of shares first for a sale transaction. This is explained by the settlement procedure of the
stock exchanges, which has fixed the pay-in day and delivery dates first. All the members have to pay money or
deliver shares first to the clearing house. On a later day fixed for payout, the clearing house pays by cheque and
delivers the shares to the members. These transactons of members with the clearing house can be effected only when
their clients in turn first pay in and send the cheques or deliver shares and later get the cheques from them or shares
delivered later after the pay-out day. If the shares are not available with the selling brokers as there were short sales
and the buyer insists on the delivery, the buyer member can ask the stock exchange or auction of those shares and
get them from any member for delivery. This process takes a few more days and leads to delays int he settlement
and clearing process. It is, therefore, possible that the buyer can get shares only after 40 to 50 days in the case of
Groups A shares and 15 to 30 days in the case of Group B shares. Similarly, the seller receives his cheque for
paymetn after 45 to 60 days after the sale is put through in the case of Group A and 30 to 40 days in the case of
Group B, on the B.S.E. With the introduction of on-line trading called BOLT in May 1995 the above periods were
brought down drastically.

Settlement Procedure
The settlement procedure of the stock exchange is to be understood to comprehend why such delays take place. The
Settlement Committee of the Exchange fixed the schedules of trading and settlement for each group separately (A,
B1 and B2 Groups). In these schedules, for each settlement, there will be 5 to 15 trading days (Saturdays, Sundays,
and holidays excluded) after which three days would be set part for effecting squaring up and carry forward (Badla).
There will be one to two days for correcting errors and omissions and secure a final settlement of each member’s
position vis-a-vis others in respect of all scrips. Taking both sales and purchase scrip-wise, the net position is arrived
and payment to be made or received is determined accordingly. Then a pay-in-day is fixed for delivering cheques or
shares to the clearing house by those who are due to give. There will be the first pay-in day and after a couple of
days, a final pay in day to help clear up all payments due. Then finally pay-out day is fixed with a gap of a day or
two for the clearing house to
make all payments out or delivery for shares to members.

Auctions
Auctions are arranged for scrips which could not be delivered even on the final day. These auctions are tenders for
sale of the desired scrips in the quantities purchased but not delivery so that delivery can be effected to the buyers.
Auction in group A is automatic when the seller fails to deliver on the appointed day and at the request of the buyer i
the case of group B. Auctions are arranged by the stock exchange by inviting bids from members to buy the shares
on behalf of the member who could not delivery the shares.

Clearing Procedure
Daily after trading is completed, members submit to the exchange their Saturdays (memos of purchases and sales
scripwise). On the next day, if there are any objections or corrections, they are submitted in the form of wandha
memos. This process goes on daily for all the 5 to 10 trading days. These memos are fed to the computer and the
daily net position is arrived at . If the stock exchange authorities impose any margins, they are collected from
members and deposited in the clearing house. At the end of the settlement, the overall net position of a member is
arrived at after taking into account the dealings, squared up and those to be carried forward. On the three days, set
apart for badla settlement, members’ squaring up position and carry forward position is known. Any objections or
errors are recorded and corrections carried out. Then the final corrected position of members is arrived at. At this
stage, the carry over margins, if imposed, are collected. This orms the basis for asking the members to pay in or
deliver the shares on the pay-in day. The entire process involves time varying from 30 day to 40 days, mainly due to
the large trading volume and secondly, due to the large 40 days, mainly due to the large trading volume and
secondly, due to the large component of specculative trading and carry forward transactions on the BSE. All this
procedure and time taken is brought down drastically due to electronic form of trading now and dematerialisation of
shares. On the NSE, the deliveries and auctions take place within a shorter period of 7 to 10 days.
Regulation
The regulation of trading on the stock exchanges takes various forms. The objective is to curb excesses and to
ensure a stable market. Over-trading and possible defaults can be avoided by these measures. Normally, the fixation
of trading hours, methods of trading, dealing clearing and settlement, etc. are all done as per the Rules and Byelaws
of the Exchange. The methods of regulation of trading are as follows :
1. Fixation of daily margins on both purchases and sales which are to be paid by buyers and sellers on their daily
position.
2. Fixation of carry-over margins to be paid on purchases and sales carried forward to the next settlement.
3. Adhoc margins on any scrip or a group shares, if trading exceeds some limits.
4. Fixation of limits to trading in each scrip and/or for each member.
5. Fixation of maximum and minimum prices or a band of prices for shares in times of extreme volatility of the
market. (Volatility Margins)
6. Suspension of trading in a few or any scrips on banning carry forward business, through circuit breakers.
7. Shifting scrips from Group A to Group B and vice versa to reduce carry-over business.
8. Reduce the trading hours and/or confine trading to hand delivery basis or cash basis, etc.

National Market System

A high powered Study Group on the Establishment of New Stock Exchanges under the chairmanship of Shri M.J.
Pherwani has submitted its Report in June 1991. This Study Group has recommended some crieteria for setting up of
new Stock Exchanges and favoured the licensing of additional trading floors (ATF), instead of multiplying the
number of Stock Exchanges in the country. The Study Group has also recommended the setting up of a model
National Stock Exchange at New Mumbai (NSE) which will develop the National Market System in the country.
Any Stock Exchange should have the minimum level of infrastructure in terms of Space, Tele-communications,
Computerisaton, On-line processing system, Library, Research facilities, Publicity Dept. etc. All these were
recommended for the “National Market” to be set-up by NSE.

Charateristics
The characteristics of National Market System are as follows :
1. Completely automated system in terms of both trading and settlement procedures to be provided through the
Securities Facilities Support Corporation.
2. Compulsory market makers/jobbers to provide liquidity and ready market.
3. The members would be as large as 1000 and Corporate and Institutional members would also be there draw from
various parts of the country and to represent the professionals on an All India basis.
4. Only medium and large sized companies and PSUs are expected to be listed on this Exchange and it will
complement the existing Exchanges.
5. The NSE would have a separate trading time allotted for debt instruments in order to have the beneficial effect of
creating an active secondary market in debt instruments.

Objectives
To objectives of this NMS are as follows :
1. To help the privatisation of Public Sector Units through listing of their shares on this Exchange.
2. To spread the investment habit and cult to savers in the rural and semi-urban areas as well.
3. To professionalise the members with a view to improve the investor services.
4. To create more employment opportunities in the service sector within the orbit of the Capital Market. (Volatility
Margins)
5 To promote the market for debt instruments.

Study Group Recommendations

As per the recommendation of the Study Group, the present system of Stock Exchanges has failed to cater to the
needs of the genuine investors. The dent market or debenture and bond trading was neglected and speculation and
manipulation of the markets became the order of the day. The Study Group has therefore recommended the setting
up of a new National Stock Exchange at New Mumbai and National Market System, based on the New Bombay
Stock Exchange transactions. The NMS was to be devleoped on a three tier basis for uniform and high quality
trading, settlement, clearing and depository services for the nation as a whole. The three tier Stock Market structure
is as follows:-
1. Principal Stock exchanges coprising the five major Exchanges at Mumbai, Delhi, Calcutta, Chennai and
Ahmadabad.
2. Regional Stock Exchanges comprising of other Exchange in the country.
3. Additional Trading Floors, sponsored and managed by the principal or a Regional Stock Exchange, as the case
may be.

Experience in Foreign Countries

In the U.S., the Securities Act Amendments of 1975 dicrected to SEC to work towards setting up of a NMS. The
SEC has left the initiative to the security industry. In 1977 the New York Stock Exchange has linked itself to
Philadelphia Stock Exchange to create in Inter-market Trading System (ITS). By 1981 almost all the Stock
Exchanges were linked to New York exchange. The ITS arranges for concurrent display electronically of the current
quotes of eligible shares. The broker has a choice to put his deal either in the Exchange where he is physically
present or in any other Exchange. If he decides to deal in another Exchange he has put his order or commitment to
trade in the electronic system. This is valid for a fixed period at that specified price. If it is accepted by anybody in
that Exchange, the deal is put through. Otherwise it is rejected. The companies under NASDAQ (National
Association of Security Dealers Automated Quoted system), have also joined the NMS as a next stage in 1982. Such
companies satisfying some financial criteria were designated as Tier I companies and are designated as part of NMS.
Some other companies have also been permitted to be on NMS on Tier II on a voluntary basis. More than 1000
companies of NASDAQ are traded on the NMS and constitute an important component of the NMSin the U.S. In the
U.K., London is the market around which all other
markets revolve and before the London market the other Stock Exchanges fade away into insignificance. The NMS
in the U.K. is developed on the basis of London quotes and other markets are more or less trading floors only. The
Inter-market Trading System in U.K. connects all Stock markets in U.K. to London and the trading pattern revolves
around the London Quotes although the other Stock Markets have maintained their individualities in theory. The
electronic display on the Quotas around the whole of U.K. of all scrips quoted in London facilitates the Inter market
Trading System. The eight national Stock Exchanges in FDR of Germany were linked in 1989 into a single screen
based trading system, where in Frankfurt became the centre piece of the trading and others were trading on the basis
of Frankfurt Quotes. But in none of the other developed or developing countries, a new Stock Exchange was set-up
to develop the NMS, as proposed by Pherwani Committee. The Bombay Stock Exchange which accounts for 2/3rds
of total trading in India has claimed that it can act as the Centre price of NMS as New York in USA and London in
UK and that there is no need for setting up a separate New Bombay Stock Exchnage (NSE), as suggested by
Pherwani Committee. But the Government has accepted the Committee’s recommendations and entrusted to the
Stock Holding Corporation of India
(SHCI), the task of setting up the Central Depository System to immobilise the Paper Certificates, National Clearing
and
Settlement Corporation to administer a National Settlement System as between the Stock Exchanges and a Securities
Facilities Support Corporation to establish and maintain an electronic network for this purpose. The National Stock
Exchange was set up accordingly in 1992, as referred to earlier.

National Clearance and Depository System

The new system which the Stock Holding Corporation of India is assigned to set up by the Ministry of Finance for
clearance and depository functions of the stock Exchange at the national level is called the National Clearance
Settlement and Depository System. It comprises of (a) National Depository System (b) National Trade Comparison
and Reporting System and (c) National Clearance System. From the world wide experience, there does not appear to
be any single system which can be transplaned on India soil as it is. There is a complexity of legal hurdles,
procedures and habit
problems to face in India for a change of this type.

Present Settlement and Clearance System

The growth of equity cult in India in eighties has put the present system of settlement and clearance to serious strain.
Besides the work load on the Clearing Agencies and Share Transfer Agencies has increased multifold. These led to
many problems to investors arising out of systematic risks like counter party risk, credit risk, bad deliveries, long
delayed deliveries, counterfeit scrips, forged scrips, etc. These have increased to alarming levels in the Nineties. The
Indian investors may not themselves tolerate these developments not to speak of International investment Groups or
Funds,
interested in Indian markets. Our present system had outlived its usefulness and since it is not possible to have a
revolutionary change in the system, it is better to evolve a system of settlemtn based on dematerialization of physical
certificates and transfer of shares on the basis of book entries. The new system will have to be based on a change in
legal
system, changes in banking practices, settlement and clearance system. To start with, a book entry system for
transfers as
between broker members can be arranged as is done by the Bombay Stock Exchange wiht the Bank of India
Holdings, set up separately for this purpose. At the national level, the National Depository was set up long with
many participant
depositories. The Central depository system was accepted by the government SEBI Guidelines were issued for the
depositories and the Central Depository.

National Trade Comparison and Reporting System

Its function is to establish the forms and conditions of contracts after trade execution in the securities markets. First
the
trade execution and then reporting of these for matching of the terms of the contracts and trade comparison will led
to the output of National Trade Reporting Systems as matched transactions. This will be the input for the National
Clearing System. National Clearing System ensures that clearing as between brokers of different Stock Exchanges
should be through book entries. This would mean that clearing can take place nationally on a standard basis to
prepare the matched transactions for a depository settlement. The Central Depository System aims at immobilization
of physical certificates. This is done by means of book entries with Central Depository who keeps custody of all
physical certificates as a first step.. As a next step, new issues will be made as book entries only ad not as physical
certificates. Book entry transfers will lad to quicker transfers and at lower costs. It can meet theincreasing work load
of investment activity and dealings leading to increasing volume of transfer work. To put into practice the above
system, a number of hurdles have to be overcome and changes have to be effected in the legal system, inheritance
rights, pledges and hypothecation and practices of banks in this regard and practices of companies with regards to
share transfers etc. The legal system should recognize the transfer of ownership by the necessary book entries. The
rights of beneficial ownership are to be vested on the basis of the records with the Depository. The practices of
banks and other financial institutions have to be changed also to permit pledge and release of pledge on the basis of
hypothecation of National Depository System on behalf of the investors and not by physical scrips, as at present.
Companies and transfer agents have to recognise the book entry transfer system. Similarly, the need for transfer
deed and collection of stamp tax for transfers have to be modified to suit the book entry system of transfers. Some of
these changes are alreadyimplemented in the transfer mechanism adopted by NSE and BSE.

Internet Broking
The SEBI has approved internet trading in a limited form towards the end of 1999. The SEBI Committee on internet
based trading and services has allowed internet to be used as an Order Routing System (OR) through registered
stock brokers on behalf of clients for execution of trades. Internet broking refers to the use of the Net as a medium
for communicating client orders to the Stock Exchanges through the Broker websites. These sites may serve a
variety of functions from allowing full trading through the website to features like on line stock quotes, information
and analysis etc.

Order Routing System (ORS)

The broker offering internet trading facility provides an electronic spave for the customer to enter the name fo the
security, buy and sell orders, quantity and price specifications. Records are kept by the broker of all such customer
orders for execution. Once the broker system receives the client order, it is checked electronically against the
customer’s account and routed out by the broker to the appropriate exchange for execution. This constitutes what is
called order routing system and the customer receives a message confirming the order. Once the transaction is
completed the client’s portfolio ledger account is updated to reflect the transaction. This internet facility has both
advantages and disadvantages. It provides transparency, and best quotes possible at any time. An investor will have
control over the information and quotes and will be able to hit a quote on an on-line basis. Doubts about the broker’s
capacity and integrity will be non-issues. The probems with internet broking are the risk of safety and
confidentiality. There are possibilities of someone hacking into the system and possible malpractices. These are
controlled by SEBI through the Stock Exchanges. For an individual broker a networth of Rs. 50 lakhs is laid down
and Stock Exchanges can insist a adequate networth, limits to trading and collect margins and ensure Trade
guarantees. Presently e-broking an internet
constitutues about 25% of total trade on NSE.
E-Broking
SEBI’s Role
SEBI has asked the Stock Exchanges to ensure that the broker has enough verifiable information about clients and
asked brokers to have clearly set exposures and turn over limits for each client. A model broier client agreement
form set out by SEBI spells out the obligations and rights of each side to the agreement. The broker web sites should
contain information on Investor Protection Rules, Arbitration Rules and display all Stock Exchnage Rules and
Regulations. Brokers cannot offset transactions of clients but have to go through the Exchange. Among security
features demanded by SEBI unique user identification number and passwords which can be changed from time to
time to prevent hacking by outsiders. SEBI has laid down that the system should have secuirty reliability and
confidentiality of data through the use of encryption technology. The Exchanges must also ensure that records are
maintained in electronic form by the broker and that they are not susceptible to manipulation and that adequate back
up and storage facilities are available. The NSE Members plannd to provide internet trading facilities in 22 countries
outside India, including U.S.A., and South Asian Countries. NSE has 300 centres within the country with the facility
to execute a deal on the NSE from any where in the country within two second. Once the regulations are in place, a
non-resident investor will be at the same level as a resident investor in ters of facility for trading. In India, SSKI,
KBS Cap, Motilal Oswal, Khandwala Securities,
I-sec, IL & F Securities are some of the brokerages which has got into internet broking shortly after it is set to
operate.

Dynamics of Net Trading in Stocks

Net broking is now permitted by SEBI, subject to the following guidelines :
1. SEBI registered brokers must apply to their respective Stock Exchnages for formal permission.
2. Brokers must have a minimum net worth of Rs. 50 lakhs.
3. SEs must ensure that the system used by brokers has the provision for security, reliability and confidentiality.
4. The brokers must have sufficient verifiable information on clients, their creditworthiness, etc.
5. Brokers must enter into agreements with such clients who want to use net trading, setting out the rights and
obligations, including fees, service standards, etc.
6. S.Es have to monitor complaints and to ensure minimum service levels by brokers.
7. Contract Notes to be passed to clients within 24 hours of trade execution.
8. All orders of clients have to pass through the Exchange and no cross trading is permitted.

Emerging Role of Stock Exchanges

1. As per the existing Law, the Stock Exchange is an association of member brokers for the purpose of facilitating
and regulating trading in securities. It is thus a self regulatory organisation (SRO). The traditional emphasis was on
regulation by the SRO in the interest of members. Now demutualisation of Stock Exchanges has separated the
ownership from regulation of exchanges.
2. The world wide trend is now towards greater self regulation by the SROs along with the co-ordinating and
supervisory role of the Goernment. At the same time, the role of SROs including those of Merchant Bankers and
Mutual Funds has increased in the direction of strict enforcement of a code of conduct and the rules of the game in
the conduct of their business. The SEBI is however moving in the direction of more regulation.
3. In the evolution of the role of the stock exchanges, the trend is moving more in the directionof the public interest.
The investor population has increased and their interest have become paramount both in the eyes of the government
and the SROs for reasons of promoting the Capital Market. The representation of public on the Board of Directors,
the facilities provided to redress their grievances throught the Grievances Cell of the Stock Exchages have all proved
to be in this direction.
4. The Stock Exchanges have been growing as Public Service Institutions by providing a variety of services to the
investors. To give examples of such services, mention may be made of the following :
a. Provision of Directory of Corporate information useful for a scientific assessment of the fundamentals of the
companies before making investment.
b. Publication of share prices at which tade took plae daily in various scrips traded - open, high, low and closing
along with the volume.
c. Publication and supply to public of useful and outs/ handbooks/pamphlets giving out information on the Stock
Exchanges - the operations and developments in the Capital Market etc.
d. Investor education and training programmes for investors.
e. Settlement of dispute between member broker and their clients and investors.
f. Attending to the investor complaints against registered members and listed companies.

5. The future role of Stock Exchanges will be radically different from the present, as their development role will be
increasing much faster than their regulatory role. Along with increasing self regulation and a stricter enforcement of
a code of conduct on the members, the Stock Exchange will emerge as Public-Service Institution catering to
increasing demands of investors in the country. Of the developmental activities, education, training and research will
dominate in the years to come bringing the Stock Exchanges and the public nearer and together. This is conspicuous
by its
absence now.

6. With the increasing emphasis on the National Market System and the growth of automation, the new trend would
be integration and interlinking of Stock Exchanges at the regional and national level. This trend would be beneficial
to investors, in that they would enjoy a better market and fair play. Quicker services and better price realization at
lower costs could be achieved by the new system. The Stock exchanges would thus move in the direction of a
National Market system through mutual cooperation, co-ordination and electronic linkages of the trading floors
through the satellite telecommunication system and quicker display of information. The BSE has introduced the
BOLT on line electronic trading. The BOLT of BSE is now kept open to members of other Stock
Exchanges, which may open up a National Market System in India. An Inter-connected Stock Exchange is already
set
up with a few regional Stock Exchanges like Hyderabad, Cochin, Bangalore, Vadodara, etc. as members. The
members of these regional Exchange can also deal in I.C.S.E.

7. Where there are no Stock Exchanges, trading floors would be provided and electronic display of the prices of
shares in the national market would help trade in the local trading floors. IN the Computer-aided Trading System,
there will
be no need even for the trading floor, but until the complete automation takes place, the trading floor system may
continue, as it is more economical than setting up of separate Stock Exchanges at innumerable centers.

8. With the setting up of the Central Depository System and the National clearing and settlement system, there will
be dematerialization and immobilisation of physical paper certificates and the trading and settlement would take
place on the book entry system. The method of pass book entries in the banks would be the order of the day for the
Stck Exchanges. The National Securities Depository Ltd. Is the Central Depository for the operations in a Demat
form of the various Stock Exchanges in the country. There are now more than 600 scrips in compulsory demat
trading. 9. NSDL is helping the operations of the Rolling Settlement System in 10 scrips at the start of the new
millennium in 2000, which is expected to be extended to more scrips in the years to come. There were about 96
scrips in Compulsory Rolling Settlement System, in 2000-01, which was increased further in the following year.

10. e-broking and e-transfer of funds and e-trading etc. is tending to make our stock exchanges on line with major
international Exchanges like New York or London. Many of our company shares are listed in foreign exchanges and
traded. The trend to globalisation is growing faster due to the operation of many FIIs and FFIs in the Indian Capital
market.

11. Derivative segment is growing fast particularly since 2001, when trading in options and futures, followed by
Delhi and Calcutta.

Company Name & Type of Stock

This column lists the name of the company. If there are no special symbols or letters following the name, it is
common
stock. Different symbols imply different classes of shares. For example, “pf” means the shares are preferred stock.
Ticker Symbol
This is the unique alphabetic name, which identifies the stock. If you watch financial TV, you have seen the ticker
tape move across the screen, quoting the latest prices alongside this symbol. If you are looking for stock quotes
online, you always search for a company by the ticker symbol.

Trading Volume
This figure shows the total number of shares traded for the day, listed in hundreds. To get the actual number traded,
add
“00” to the end of the number listed.

Day High & Low

This indicates the price range at which the stock has traded at throughout the day. In other words, these are the
maximum and the minimum prices that people have paid for the stock.

Close
The close is the last trading price recorded when the market closed on the day. If the closing price is up or down
more than 5% than the previous day’s close, the entire listing for that stock is bold-faced. Keep in mind, you are not
guaranteed to get this price if you buy the stock the next day because the price is constantly changing (even after the
exchange is closed for the day). The close is merely an indicator of past performance and except in extreme
ircumstances serves as a ballpark of what you should expect to pay.

Net Change
This is the rupee value change in the stock price from the previous day’s closing price. When you hear about a stock
being “up for the day,” it means the net change was positive.

Quotes on the Internet

Nowadays, it’s far more convenient for most to get stock quotes off the Internet. This method is superior because
most sites update throughout the day and give you more information, news, charting, research, etc.

What Type of Investor Will You Be?

There are plenty of different investment styles and strategies out there. Make sure you don’t get into the market
before you are aware of the various terms. Before you jump in without the right knowledge, you should be aware of
various investors:
The Bulls
A bull market is when everything in the economy is great, people are finding jobs, GDP is growing, and stocks are
rising.
Things are just plain rosy! Picking stocks during a bull market is easier because everything is going up. Bull markets
cannot last forever though, and sometimes they can lead to dangerous situations if stocks become overvalued. If a
person is optimistic, believing that stocks will go up, he or she is called a “bull” and said to have a “bullish outlook.”

The Bears
A bear market is when the economy is bad, recession is looming, and stock prices are falling. Bear markets make it
tough for investors to pick profitable stocks. One solution to this is to make money when stocks are falling using a
technique called short selling. Another strategy is to wait on the sidelines until you feel that the bear market is
nearing its end, only starting to buy in anticipation of a bull market. If a person is pessimistic, believing that stocks
are going to drop, he or she is called a “bear” and said to have a “bearish outlook.”

The Other Animals on the Farm - Chickens and Pigs

Chickens are afraid to lose anything. Their fear overrides their need to make profits and so they turn only to money-
market securities or get out of the markets all together. While it’s true that you should never invest into something
over which you lose sleep, you are also guaranteed never to see any return if you avoid the market completely and
never take any risk, Pigs are high-risk investors looking for the one big score in a short period of time. Pigs buy on
hot tips and invest in companies without doing their due diligence. They get impatient, greedy, and emotional about
their investments, and they are drawn to high-risk securities without putting in the proper time or money to learn
about these investment vehicles. Professional traders love the pigs, as it’s often from their losses that the bulls and
bears reap their profits. Even though the bulls and bears are constantly at odds, they both can make money with the
changing cycles in the market. Even the chickens see some returns, though not a lot. The one loser in this picture is
the pig. . Be conservative and never invest in anything you do not understand. Bulls make money, bears make
money, but pigs just get slaughtered!

Stock Basics: Summary

Let’s recap what we’ve learned in this lesson:
· Stock means ownership. As an owner, you have a claim on the assets and earnings of a company as well as voting
rights with your shares.

Stock is equity, bonds are debt. Bondholders are guaranteed a return on their investment and have a higher claim
than shareholders. This is generally why stocks are considered riskier investments and require a higher rate of
return.

You can lose all of your investment with stocks. The

flip-side of this is you can make a lot of money if you invest in the right company.

The two main types of stock are common and

preferred. It is also possible for a company to create different classes of stock.

· Stock markets are places where buyers and sellers of

stock meet to trade. The NYSE and the Nasdaq are the most important exchanges in the United States.·

Stock prices change according to supply and demand.

There are many factors influencing prices, the most important being earnings.
There is no consensus as to why stock prices move the way they do.
To buy stocks you can either use a brokerage or a dividend reinvestment plan (DRIP).
Stock tables/quotes actually aren’t that hard to read once you know what everything stands for!
Bulls make money, Bears make money, but Pigs get slaughtered! Seems like we covered a lot. We hope that this
tutorial has given you a good idea of what stocks are and how the stock market works.

Notes