Stock Market of India

Introduction
Stock markets refer to a market place where investors can buy and sell stocks. The price at which each buying and
selling transaction takes is determined by the market forces (i.e. demand and supply for a particular stock).

Let us take an example for a better understanding of how market forces determine stock prices. ABC Co. Ltd. enjoys
high investor confidence and there is an anticipation of an upward movement in its stock price. More and more
people would want to buy this stock (i.e. high demand) and very few people will want to sell this stock at current
market price (i.e. less supply). Therefore, buyers will have to bid a higher price for this stock to match the ask price
from the seller which will increase the stock price of ABC Co. Ltd. On the contrary, if there are more sellers than
buyers (i.e. high supply and low demand) for the stock of ABC Co. Ltd. in the market, its price will fall down.

In earlier times, buyers and sellers used to assemble at stock exchanges to make a transaction but now with the
dawn of IT, most of the operations are done electronically and the stock markets have become almost paperless.
Now investors dont have to gather at the Exchanges, and can trade freely from their home or office over the phone or
through Internet.

History of the Indian Stock Market - The Origin

One of the oldest stock markets in Asia, the Indian Stock Markets have a 200 years old history.

18th Century East India Company was the dominant institution and by end of the century, busuness in its loan
securities gained full momentum

1830's Business on corporate stocks and shares in Bank and Cotton presses started in Bombay. Trading
list by the end of 1839 got broader

1840's Recognition from banks and merchants to about half a dozen brokers

1850's Rapid development of commercial enterprise saw brokerage business attracting more people into
the business

1860's The number of brokers increased to 60

1860-61 The American Civil War broke out which caused a stoppage of cotton supply from United States of
America; marking the beginning of the "Share Mania" in India

1862-63 The number of brokers increased to about 200 to 250

1865 A disastrous slump began at the end of the American Civil War (as an example, Bank of Bombay
Share which had touched Rs. 2850 could only be sold at Rs. 87)

Pre-Independance Scenario - Establishment of Different Stock Exchanges

1874 With the rapidly developing share trading business, brokers used to gather at a street (now well
known as "Dalal Street") for the purpose of transacting business.

1875 "The Native Share and Stock Brokers' Association" (also known as "The Bombay Stock
 Exchange") was established in Bombay

1880's Development of cotton mills industry and set up of many others

1894 Establishment of "The Ahmedabad Share and Stock Brokers' Association"

1880 - 90's Sharp increase in share prices of jute industries in 1870's was followed by a boom in tea stocks
and coal

1908 "The Calcutta Stock Exchange Association" was formed

1920 Madras witnessed boom and business at "The Madras Stock Exchange" was transacted with 100
brokers.

1923 When recession followed, number of brokers came down to 3 and the Exchange was closed down

1934 Establishment of the Lahore Stock Exchange

1936 Merger of the Lahoe Stock Exchange with the Punjab Stock Exchange

1937 Re-organisation and set up of the Madras Stock Exchange Limited (Pvt.) Limited led by
improvement in stock market activities in South India with establishment of new textile mills and
plantation companies

1940 Uttar Pradesh Stock Exchange Limited and Nagpur Stock Exchange Limited was established

1944 Establishment of "The Hyderabad Stock Exchange Limited"

1947 "Delhi Stock and Share Brokers' Association Limited" and "The Delhi Stocks and Shares Exchange
Limited" were established and later on merged into "The Delhi Stock Exchange Association
Limited"

Post Independance Scenario

The depression witnessed after the Independance led to closure of a lot of exchanges in the country. Lahore Estock
Exchange was closed down after the partition of India, and later on merged with the Delhi Stock Exchange.
Bnagalore Stock Exchange Limited was registered in 1957 and got recognition only by 1963. Most of the other
Exchanges were in a miserable state till 1957 when they applied for recognition under Securities Contracts
(Regulations) Act, 1956. The Exchanges that were recognized under the Act were:

1. Bombay
2. Calcutta
3. Madras
4. Ahmedabad
5. Delhi
6. Hyderabad
7. Bangalore
8. Indore

Many more stock exchanges were established during 1980's, namely:

 1. Cochin Stock Exchange (1980)
2. Uttar Pradesh Stock Exchange Association Limited (at Kanpur, 1982)
3. Pune Stock Exchange Limited (1982)
4. Ludhiana Stock Exchange Association Limited (1983)
5. Gauhati Stock Exchange Limited (1984)
6. Kanara Stock Exchange Limited (at Mangalore, 1985)
7. Magadh Stock Exchange Association (at Patna, 1986)
8. Jaipur Stock Exchange Limited (1989)
9. Bhubaneswar Stock Exchange Association Limited (1989)
10. Saurashtra Kutch Stock Exchange Limited (at Rajkot, 1989)
11. Vadodara Stock Exchange Limited (at Baroda, 1990)
12. Coimbatore Stock Exchange
13. Meerut Stock Exchange

At present, there are twenty one recognized stock exchanges in India which does not include the Over The Counter
Exchange of India Limited (OTCEI) and the National Stock Exchange of India Limited (NSEIL).

Government policies during 1980's also played a vital role in the development of the Indian Stock Markets. There was
a sharp increase in number of Exchanges, listed companies as well as their capital, which is visible from the following
table:

S. 194 196 197 197 198

As on 31st December 1985 1991 1995
No. 6 1 1 5 0

1 No. of Stock Exchanges 7 7 8 8 9 14 20 22

112 120 159 155 226

2 No. of Listed Cos. 4344 6229 8593
5 3 9 2 5

150 211 283 323 369

3 No. of Stock Issues of Listed Cos. 6174 8967 11784
6 1 8 0 7

181 261 397

4 Capital of Listed Cos. (Cr. Rs.) 270 753 9723 32041 59583
2 4 3

129 267 327 675 2530 11027 47812

5 Market value of Capital of Listed Cos. (Cr. Rs.) 971
2 5 3 0 2 9 1

6 Capital per Listed Cos. (4/2)(Lakh Rs.) 24 63 113 168 175 224 514 693

Market Value of Capital per Listed Cos. (Lakh Rs.)

7 86 107 167 211 298 582 1770 5564
(5/2)

8 Appreciated value of Capital per Listed Cos. (Lak Rs.) 358 170 148 126 170 260 344 803

Trading Pattern of the Indian Stock Market

Indian Stock Exchanges allow trading of securities of only those public limited companies that are listed on the
Exchange(s). They are divided into two categories:

Types of Transactions
The flowchart below describes the types of transactions that can be carried out on the Indian stock exchanges:
Indian stock exchange allows a member broker to perform following activities:

1. Act as an agent,
2. Buy and sell securities for his clients and charge commission for the same,
3. Act as a trader or dealer as a principal,
4. Buy and sell securities on his own account and risk.

Over The Counter Exchange of India (OTCEI)

Traditionally, trading in Stock Exchanges in India followed a conventional style where people used to gather at the
Exchange and bids and offers were made by open outcry.

This age-old trading mechanism in the Indian stock markets used to create many functional inefficiencies. Lack of
liquidity and transparency, long settlement periods and benami transactions are a few examples that adversely
affected investors. In order to overcome these inefficiencies, OTCEI was incorporated in 1990 under the Companies
Act 1956. OTCEI is the first screen based nationwide stock exchange in India created by Unit Trust of India, Industrial
Credit and Investment Corporation of India, Industrial Development Bank of India, SBI Capital Markets, Industrial
Finance Corporation of India, General Insurance Corporation and its subsidiaries and CanBank Financial Services.

Advantages of OTCEI

1. Greater liquidity and lesser risk of intermediary charges due to widely spread trading mechanism across
India
2. The screen-based scripless trading ensures transparency and accuracy of prices
3. Faster settlement and transfer process as compared to other exchanges
4. Shorter allotment procedure (in case of a new issue) than other exchanges
National Stock Exchange
In order to lift the Indian stock market trading system on par with the international standards. On the basis of the
recommendations of high powered Pherwani Committee, the National Stock Exchange was incorporated in 1992 by
Industrial Development Bank of India, Industrial Credit and Investment Corporation of India, Industrial Finance
Corporation of India, all Insurance Corporations, selected commercial banks and others.

NSE provides exposure to investors in two types of markets, namely:

1. Wholesale debt market

2. Capital market

Wholesale Debt Market - Similar to money market operations, debt market operations involve institutional investors
and corporate bodies entering into transactions of high value in financial instrumets like treasury bills, government
securities, commercial papers etc.

Trading at NSE

1. Fully automated screen-based trading mechanism

2. Strictly follows the principle of an order-driven market
3. Trading members are linked through a communication network
4. This network allows them to execute trade from their offices
5. The prices at which the buyer and seller are willing to transact will appear on the screen
6. When the prices match the transaction will be completed
7. A confirmation slip will be printed at the office of the trading member

Advantages of trading at NSE

1. Integrated network for trading in stock market of India

2. Fully automated screen based system that provides higher degree of transparency
3. Investors can transact from any part of the country at uniform prices
4. Greater functional efficiency supported by totally computerized network

Live Market Trend

Investments & Stock Broking

The primary thing before investing in stock markets is to have an understanding of how the stock markets operate.
Companies need capital for various purposes like expansion, research and development etc. Many companies
choose to raise funds by offering the company's shares to the public. When investors own the shares of a company
they become part owners of that company. The company gets listed on a stock exchange(s) after which its shares
start getting traded. Stock exchange is a marketplace where sale and purchase of shares take place.

In order to buy or sell shares, investors need to open a trading account with a stock broker. Investors give instructions
to their broker to buy or sell shares on treir behalf. Trading can be done through telephone, internet, or in person. The
price at which trade takes place is determined by the market forces i.e. demand and supply of that particular share in
the market. Investors hope to earn profits by buying shares at a low price and selling them at a higher price. Some
people invest into the stock market for a long period time (3-5 years or more) and some people invest with an
objective of earning short term profits (less than a year). The following terms are used frequently in stock markets.

 About Stock Markets: A marketplace where investors gather to buy and sell securities

 Trading Terminology: Frequently used terms in stock market

 Capital Gains/Taxes: Gains arising out of sale of capital assets like shares, property etc.

 Securities Transaction Tax: An easy-to-administer tax that helps in eliminating tax avoidance on sale of securities

 Bonds: Debt securities issued for a period longer than one year

Live Market Trend

 The History of Stock Brokerage Firms
Stock brokerage firms have been an established feature in the financial industry for nearly one
thousand years. Dealing in debt securities, brokers employ a variety of systems to aid investors with
the purchase and sales of stocks and bonds in a variety of markets. The firms have changed over
the years, growing to massive organizations that can affect the entire financial sector positively or
negatively with their performance. Changing with the times, the early twenty-first century saw a rise
of online trading that enabled the average investor to take part in the stock market for the first time.

1. History
o During the 11th century, the French began regulating and trading agricultural debts
on behalf of the banking community, creating the first brokerage system. In the 1300s,
houses began to be set up in major cities like Flanders and Amsterdam in which commodity
traders would hold meetings. Soon, Venetian brokers began to trade in government
securities, expanding the importance of the firms.
In 1602, the Dutch East India Company became the first publicly traded company in which
shareholders could own a portion of the business. The stocks improved the size of
companies and became the standard bearer for the modern financial system.

Significance
o The earliest brokerage firms were established in London coffee houses, enabling
individuals to purchase stocks from a variety of organizations. They formally founded the
London Stock Exchange in 1801 and created regulations and memberships. The system
was copied by brokerage firms across the world, most notably on Chestnut Street in
Philadelphia. Soon, the US exchange was moved to New York City and various firms like
Morgan Stanley and Merrill Lynch were created to assist in the brokering of stocks and
securities. The firms limited themselves to researching and trading stocks for investment
groups and individuals.

Considerations
o During the 1900s, stock brokerage firms began to move in a direction of market
makers. They adopted the policy of quoting both the buying and selling price of a security.
This allows a firm to make a profit from establishing the immediate sale and purchase price
to an investor. The conflict with brokerage firms setting prices creates the concern that
insider trading can result from the sharing of information. Regulators have enforced a system
called Chinese Walls to prevent communication between different departments within the
brokerage company. This has resulted in increased profits and greater interconnection within
the financial industry.

Effects
o The creation of high valued brokerage firms like Goldman Sachs and Bear Sterns
created a system of consolidation. Working with hundreds of billions of dollars, the larger
firms began to merge and take over smaller firms in the last half of the 20th century. Firms
 like Smith Barney were acquired by Citigroup and other investment banks, creating massive
financial institutions that valued, held, sold, insured and invested in securities. This
conglomeration of the financial sector created an environment of volatility that caused a
chain reaction when other firms like Bear Sterns and Lehman Brothers filed for bankruptcy.
Trillions of dollars of assets were tied together in different companies and resulted in a large
economic collapse in late 2008.

Features
o A large share of the brokerage firms have moved to an online format. Smaller
brokers such as E*Trade, TD Ameritrade and Charles Schwab have taken control of most
individual investors accounts. The added convenience and personal attention paid to the
small investor has resulted in a large influx of activity. In addition, the fact that the online
resources offer up-to-the-minute pricing and immediate trades makes their format appealing
to the modern user. Discounted commissions have lessened the price of trades, giving
access to a wider swath of people and adding liquidity to the market. The role of the stock
brokerage firm is ever-changing and proves to be a boon for the future of the financial
industry.