INTRODUCTION: Stock exchange is a corporation which provides the trading facilities to the trader to trade in stocks and other

securities. Stock exchange is a highly organized market where securities are purchased and sold. Stock Exchange (also called Stock Market or Share Market) is one important constituent of capital market. Stock Exchange is an organized market for the purchase and sale of industrial and financial security. It is convenient place where trading in securities is conducted in systematic manner i.e. as per certain rules and regulations. Stock exchange cannot operate or carry out its function until it is registered under the stock and exchange ordinance, 1969 after fulfilling the requirements which is described in Section 4 of the said Ordinance.

Securities:The securities traded on a stock exchange include: Shares issued by companies Debentures Bonds

To be able to trade a security on a certain stock exchange, it has to be listed there. Usually there is a central location at least for recordkeeping, but trade is less and less linked to such a physical place, as modern markets are electronics networks, which gives them advantages of speed and cost of transactions. Trade on an exchange is by members only. The initial offering of stocks and bonds to investors is by definition done in the primary market and subsequent trading is done in the secondary market. A stock exchange is often the most important component of a stock market. Supply and demand in stock markets is driven by various factors which, as in all free markets, affect the price of stocks. There is usually no compulsion to issue stock via the stock exchange itself, nor must stock be subsequently traded on the exchange. Such trading is said to be off exchange or over the counter. This is the usual way that derivatives and bonds are traded. Increasingly, stock exchanges are part of a global market for securities

Shares:The total authorized capital in the company is divided into small units and each is individually called Share. You can buy large or small lots to match the amount of money you want to invest. When the company does well, its shares can rise in value. If the company hits a bad patch, its share can fall in value. The shares are considered as the main source to raise companys capital.

Share Holder:-

The people who provide finance to company by purchasing shares are called shareholders.

Types of shares:1. Preference Shares: These are shares whose holders have preferential rights in respect of the payment of dividend and repayment of capital in the event of winding up. The rate of dividend on these shares is fixed. There are further two types of preference shares. o Cumulative preference shares: If the profit if company is not enough to pay dividend on any kind of shares at the end of financial year than the right of dividend on these shares accumulates until all arrears of unpaid dividend have been paid. o Non-Cumulative preference shares: These are the shares on which if dividend is not paid out of current years profit in any year then it is never paid. 2. Ordinary Shares: These shares are the shares on which dividend is not paid at fixed rate. Ordinary shareholders receive the dividend proportionally out of profit earned by the company after the payment of fixed dividend on preference shares. 3. Deferred Shares: The share issued to promoters of the company is called deferred or founders shares. The dividend on these shares is paid after the payment of dividend on all other types of shares.

Types of operators on stock exchange

The operators who buy and sell securities on stock exchange are of several types. Some of them are described below: 1. Brokers: A broker is a member of the stock exchange. He buys and sells the securities on the behalf of the outsiders who are not the members. He charges brokerage for his services. He does not specialize in any particular security. He buys sells all types of securities according to the orders placed by his clients. 2. Jobbers: The jobber is a member of stock exchange but he buys and sells securities on his own behalf. He is a dealer in securities. He usually specializes in one type of security. His income comes from the profit or price difference in the purchase and sale of securities. A jobber normally deals for himself but he is not prohibited from buying and selling securities on the behalf of others. 3. Bulls:

A bull is a speculator who expects a rise in prices. Therefore, he buys securities with a view to sell them in future at a higher price thereby make profit. When the conditions in the stock exchange are dominated by bulls, it is called a bullish market. When the prices fall and bulls have to sell at loss, it is called bull liquidation. 4. Bears: A bear is a speculator expects fall in prices. Therefore, he sells securities for future delivery. He sells securities, which he does not possess. He sells with the hope to buy the securities at lower price before the date of delivery. The efforts of bears to bring down the prices artificially are known as bear raids. When bears dominate the market, it is called a bearish market. When prices are rise and bears have to make purchases to meet their commitments, it is called bear covering. Stag It is a cautious speculator. He applies for shares in new companies and expects to sell them at a premium if he gets an allotment. He selects those companies whose shares are more in demand and carry premium. He generally sell the shares before being called to pay the allotment money. He is not interested in allotment of securities. He applies for large no. of shares so that he gets some allotment even if there is heavy over subscription. Lame Duck Where bear finds it difficult to fulfill his commitment, he is called struggling like a lame duck.

PROCEDURE OF BUYING AND SELLING OF SHARES

In order to purchase or sell securities on a stock exchange, the following steps have to be taken: 1. Inquiry about the prices Stock exchange is the market where shares, debentures or securities are brought for dealing. This place appears in no way to be different from the Bazar. The person who wants to buy or sell at the stock exchange must approach to a broker who is one of members of the exchange. When a broker receives an order from a client, be enters the Hall. It should be noted that non-member is not allowed to go to the Hall of the exchange and transact business on his own behalf. 2. Placing the order:

There are three parties involved in the dealing of shares: o The Stock Broker o The Client o The Jobber The stock broker simply acts as agent and contacts the particular jobber in the stock exchange on behalf of the client. He does not disclose to the jobber whether he is a buyer or seller of shares. He therefore, asks him to quote two prices: I. The higher prices (OFFER PRICE) at which he is ready to sell the shares. II. The lower prices (BID PRICE) at which he is ready to buy the shares. For Example, Mr. Ali wants to sell one thousand shares of a Company. He contacts a broker dealing on the stock exchange. The broker asks a jobber to give quotations. He does not disclose the jobber whether he wants buy or sell the shares of a company. The jobber gives two prices, one at which he is willing to sell and the other at which he is ready to buy. For instance, the two quoted prices are Rs.21.90 and Rs.22.00 in a thousand. This means broker is willing to purchase at Rs.21.90 and sell at Rs.22.00 per share. If the broker is not satisfied, he can go to another jobber or ask the first one to make it closer (i.e. to reduce the margin between buying and selling). If the broker is satisfied with the new quotation, he then contacts with his client informs him the bid of the share. If the client agrees to the bid price, then bargain is struck 3. Preparing the contract note: The stockbroker prepares a contact note. The contact note generally contains the following information: Name and the address of the stockbroker. The name and address of the jobber. The type and price of the share. The commission of the broker. The date of transaction

Generally three copies of contract note are prepared. One copy is sent to the client, second is forwarded to the selling dealer and third he retains himself for record. On the following day, both the parties compare their contract notes. If, on comparison, the contract notes are found to be corrected, each checking clerk will sign to it. The specimen signature of the checking clerks are noted on the cards which they must carry with them when they enter the contract hall All errors in the contract notes are naturally settled by both the parties and thus client does not suffer.

4. Settlement of transaction There are two following basis of dealing in every stock exchange:

1. Cash Basis; 2. Account Basis; Cash basis This is also known as Ready Delivery basis. Under this method, the parties intend to take delivery of the securities and pay for them. Contracts are to be settled either on the same day or within a short period of time. Usually, period, allowed for its settlement is three days or five days but not more than seven days. In such cases each day is called a settlement day. Accounts basis On this basis, contracts are settled on fixed settlement days occurring at fortnight intervals. Such contracts can be settled in the next settlement period if both parties agree between themselves. In other words, there can be a postponement of the date of settlement of such contracts. In some stock exchanges settlements are made through the stock exchange clearing house.

6.Role of Stock Exchange in economy

Stock exchanges have multiple roles in the economy, this may include the following: 1. Raising capital for businesses: The Stock Exchange provides companies with the facility to raise capital for expansion through selling shares to the investing public. It induces people to save and invest in securities. There is regular publicity of its operations, which encourages savings and investments. People know that when they need money, they can easily sell their securities on stock exchange. Therefore, they are more willing to invest their savings in securities. Thus a stock exchange serves as an instrument for raising capital. 2. Mobilizing savings for investment: When people draw their savings and invest in shares, it leads to a more rational allocation of resources because funds, which could have been consumed, or kept in idle deposits with banks, are mobilized and redirected to promote business activity with benefits for several economic sectors such as agriculture, commerce and industry, resulting in stronger economic growth and higher productivity levels and firms. 3. Facilitating company growth: Companies view acquisitions as an opportunity to expand product lines, increase distribution channels, hedge against volatility, increase its market shares, or acquire other necessary business assets. A takeover bid or a merger agreement through the stock market is one of the simplest and most common ways for a company to grow by acquisition or fusion. 4. Redistribution of wealth: Stock exchanges do not exist to redistribute wealth. However, both casual and professional stock investors through dividends and stock

price increases that may result in capital gains will share in the wealth of profitable businesses. 5. Corporate governance: By having a wide and varied scope of owners, companies generally tend to improve on their management standards and efficiency in order to satisfy the demands of these shareholders and the more stringent rules for public corporations imposed by public stock exchanges and the government. Consequently, it is alleged that public companies (companies that are owned by shareholders who are members of the general public and trade shares on public exchanges) tend to have better management records than privately-held companies (those companies where shares are not publicly traded, often owned by the company founders and/or their families and heirs, or otherwise by a small group of investors). However, some well-documented cases are known where it is alleged that there has been considerable slippage in corporate governance on the part of some public companies. The dot-com bubbles in the early 2000s, and the subprime mortgage crisis in 2007-08, are classical examples of corporate mismanagement. Companies like Pets.com (2000), Enron corporation (2001), One.Tel (2001), Sunbeam (2001), Webvan (2001), Adelphia (2002), MCI WorldCom (2002), Parmlat (2003), American International Group (2008), Lehman Brothers (2008), and Satyam Computer Services (2009) were among the most widely scrutinized by the media. 6. Creating investment opportunities for small investors: As opposed to other businesses that require huge capital outlay, investing in shares is open to both the large and small stock investors because a person buys the number of shares they can afford. Therefore the Stock Exchange provides the opportunity for small investors to own shares of the same companies as large investors. 7. Government capital raising for development projects: Governments at various levels may decide to borrow money in order to finance infrastructure projects such as sewage and water treatment works or housing estates by selling another category of securities, known as bonds. These bonds can be raised through the Stock Exchange whereby members of the public buy them, thus loaning money to the government. The issuance of such bonds can obviate (to remove) the need to directly tax the citizens in order to finance development, although by securing such bonds with the full faith and credit of the government instead of with collateral (side by side), the result is that the government must tax the citizens or otherwise raise additional funds to make any regular coupon payments and refund the principal when the bonds mature. 8. Barometer of the economy: At the stock exchange, share prices rise and fall depending, largely, on market forces. Share prices tend to rise or remain stable when companies and the economy in general show signs of stability and growth. An economic recession, depression, or financial crisis could eventually lead to a stock market crash. Therefore the movement of share prices and in general of the stock indexes can be an indicator of the general trend in the economy. 9. Regulation of companies:

The stock exchange exercises a wholesome influence on the management of companies. A company that wants to be listed on stock exchange must bind itself to the rules and regulations prescribed by the stock exchange. 10. Employment Opportunities: Stock exchange provides employment opportunities to the jobbers and other members who perform their activities in the stock exchange. So it is an important source of employment not only for investors but also for the members and their employees.

Advantages of Stock Market o Assist in Raising funds : The stock exchange enables public limited companies to raise long term funds from the stock market. The companies can issue shares and debentures and obtain long term funds. o Facilitates Listing of Shares:- The stock exchanges facilitate listing of shares issued by public limited companies. o Generates Employment:- A number of brokers, sub- brokers, get employment because of stock exchange. o Capital Formation:- The stock exchange encourages investors to invest in the primary and secondary stock market. Investment leads to capital formation. o Stimulates Industrial Development:- It facilities mobilization of long term funds through the issue of shares and debentures. The long term funds utilized for (a)Expansion and modernization. (b) Setting up of new projects. o Facilitates Regional Development:- long term funds generated can be utilized for setting up units in backward areas. This leads to regional development in the country. o Provides Investment Opportunity:- Investors are provided with an additional opportunity to invest in shares. The returns from the stock markets are much higher as compare to traditional forms of investment. o Provides Revenue to the Government:- It provides revenue to the Government, either directly or indirectly. The stock exchanges pay tax on the revenue or profits earned by them. o Promotes Efficient Management of Listed Companies:- Stock exchange indirectly promotes efficiency of the management of listed companies.

Higher the efficiency, higher is the performance, and as such higher the prices of the shares on the stock market. Disadvantages of Stock Exchange o Huge risk: Investing in stocks can helps any person earn an income that he or she needs, it can also pose a huge risk. The stock exchange can have its ups and downs. In a tough economy, it can be a very difficult situation for people that have a lot of money invested in the stock exchange. o Volatility of stock exchange : Sometimes, people will put all of their savings in the market. This is one of the worst choices that a person can make, because the market can eat up all of the savings that a person has worked for in his or her life. o Unpredictable market: One can never predict what will happen in the market so it can be quite dangerous to invest a large amount of money.

Functions in favor of the investor:

It permits him the access to the profitable activities of the big companies. It offers liquidity to the security investments, through a place in which to sell or buy securities. It permits for the investor to have a political power in the companies in which he invests its savings due that the acquisition of ordinary shares gives him the right (among other things) to vote in the general shareholders meetings of the company in question. It offers the possibility of diversifying your portfolio by enlarging the field of strategy of investments due to alternative options, as could be the derived market, the money market, etc.