Stock exchange is a platform of primary and secondary market. Here, the existing securities have a platform where they can be bought and sold. The investors can invest in this market through stock exchanges can convert their cash into securities or they can disinvest and convert their securities back in the form of cash. According to the securities contract regulation act, 1956, stock exchange is a body of individuals whether incorporated or not, is formed for the purpose of assisting, controlling and regulating the business of buying and selling of securities. To be traded on the stock exchanges for the general public, securities must be first listed on them. An efficient stock exchange environment will help an economy grow as it helps the country to have both – an active primary market and a healthy secondary market. Stock exchanges are useful for both – the companies and the investors, as it provides easy rising of finance to the companies and at the same time provide liquidity and safety to the investors.
Functions of a stock exchange
There are several important functions which a stock exchange performs. They are as under:
Providing liquidity and marketability to existing securities
The main function of stock exchange is to benefit both – the companies and the investors. It helps to list the securities of the companies and thus provides liquidity and marketability to the securities of the company. It also helps in this by improving the mechanism with the help of investors as they can invest, reinvest and disinvest whenever they want to.
Pricing of securities
Pricing of securities in a secondary market are not decided by the company but they are decided by the demand and supply of the securities in the market at a given point of time. The prices keep on fluctuating, even several times in a day. Constant valuation takes place whenever the investor wants to buy or sell the securities and this valuation helps in providing the information to the buyers and the sellers in the market on the spot.
Safety of transaction
Companies listed on the stock exchange are credit worthy companies. This improves the regulation of securities as dealings are defined according to the legal framework. Every investor wants a good and safe environment for their savings. Thus, stock exchange tries to safeguard the interest of an investor and provide them the safety of transaction.
Contributes to economic growth
Stock exchanges not only benefit the investors but also benefit the companies as they help them in getting the funds and also helps them to improve their credit worthiness. The process where the securities are invested, reinvested and disinvested, the funds will be invested into the most productive areas of an economy. This will help in capital formation and thus in economic growth.
Spreading of equity cult
Stock exchange helps in promoting the equity culture as it urges people to invest and get the ownership of the securities by educating the general public about the investment.
Providing scope for speculation
Speculations are of two types. A healthy speculation and unhealthy speculation. A healthy speculation helps the economy to grow. Healthy speculation is good for the stock market as it helps in ensuring the liquidity and price continuity of the securities. Although, this should be done under the provisions of the law and in fully controlled manner.
Trading procedure on a stock exchange
Earlier the buying and selling of securities was done though auction or general public outcry. Where the people used to start the action of the securities they want to buy. Later on, this was transferred to an online screen based system which is an electronic form and easy to use. The exchange of securities thus shifted from the stock market to the broker’s office.
Broker: Broker is an individual or a firm who deals with the transaction between the buyer and a seller i.e. acts as an intermediary between the two.
Few years earlier, these people used to manage and control and even own the stock exchanges, this increased the conflict of interest of the broker and the investor. Thus a concept of demutualisation came in. wherein, the ownership and control of stock exchanges are separated from the trading rights of the members.
Process of trading and settlement
- Find or select a broker: a broker who can be an individual, partnership firm or a corporate body needs to be selected if the investor wants to invest in the stock market. Transactions in a stock market cannot be done in an individual capacity. Broker or sub – broker is important as an intermediary in the transaction.
- Opening a demat account: a dematerialised or demat account is an account which is important for an Indian citizen whenever he or she wishes to deal in securities. Earlier, whenever a investor used to buy a security, he or she used to get a share certificate as a proof of the transaction and it was exchanged again if the client wants to disinvest in the securities. But this was not an efficient process as it used to lead to the theft, forgery and also in delay in transfers. Thus, a dematerialised account came into scene wherein everything transferred to online software.
- Placing the order: after the demat account is opened, then the investor is eligible to buy the securities. He can place the order with the broker who in turn will place the order to the company. This is done very quickly. An investor must be specific about the securities he or she wants to buy and specify the amount at which they want to purchase it.
- Execution of the order and settlement: after the order is placed by the investor, the broker will execute the order according to the instructions of the investor. Then the actual transfer of securities take place which can be in two forms –
- On the spot settlement– in this the settlement takes place on the spot.
- Forward settlement– in this the settlement will take place on the future date depending upon the price of securities. For example, when an investor wants to invest in shares of Reliance industries at Rs. 900 per share but suppose right now the share price is Rs. 940, then the investor will ask the broker to buy the shares for him whenever the price of shares comes down to Rs. 900.