INTRODUCTION TO STOCK MARKET

A stock market or equity market is the aggregation of buyers and sellers (a loose
network of economic transactions, not a physical facility or discrete entity)
of stocks (shares); these are securities listed on a stock exchange as well as those
only traded privately.

Stock exchanges
A stock exchange is a place to trade stocks. Companies may want to get their stock
listed on a stock exchange. Other stocks may be traded "over the counter", that is,
through a dealer. A large company will usually have its stock listed on many
exchanges across the world.

Market participants include individual, retail, investors and traders, institutional

investors such as mutual funds, banks, insurance companies and hedge funds, and
also publicly traded corporations trading in their own shares. Some studies have
suggested that institutional investors and corporations trading in their own shares
generally receive higher risk-adjusted returns than retail investors. This may be
attributable to their tendencies to hold investments for longer periods of time .

The BSE and NSE

Most of the trading in the Indian stock market takes place on its two stock
exchanges: the Bombay Stock Exchange (BSE) and the National Stock
Exchange (NSE). The BSE has been in existence since 1875. The NSE, on the
other hand, was founded in 1992 and started trading in 1994. However, both
exchanges follow the same trading mechanism, trading hours, settlement process,
etc. At the last count, the BSE had about 4,700 listed firms, whereas the rival NSE
had about 1,200. Out of all the listed firms on the BSE, only about 500 firms
constitute more than 90% of its market capitalization; the rest of the crowd consists
of highly illiquid shares.

Almost all the significant firms of India are listed on both the exchanges. NSE
enjoys a dominant share in spot trading, with about 70% of the market share, as of
2009, and almost a complete monopoly in derivatives trading, with about a 98%
share in this market, also as of 2009. Both exchanges compete for the order flow
that leads to reduced costs, market efficiency and innovation. The presence
of arbitrageurs keeps the prices on the two stock exchanges within a very tight
range.

History

Established in 1875, theBombay Stock Exchange is Asia's first stock exchange

In 12th century France the courretiers de change were concerned with managing
and regulating the debts of agricultural communities on behalf of the banks.
Because these men also traded with debts, they could be called the first brokers. A
common misbelief is that in late 13th century Bruges commodity traders gathered
inside the house of a man called Van der Beurze, and in 1409 they became the
"Brugse Beurse", institutionalizing what had been, until then, an informal meeting,
but actually, the family Van der Beurze had a building in Antwerp where those
gatherings occurred; the Van der Beurze had Antwerp, as most of the merchants of
that period, as their primary place for trading. The idea quickly spread
around Flanders and neighboring counties and "Beurzen" soon opened
in Ghent and Rotterdam.

In the middle of the 13th century, Venetian bankers began to trade in government
securities. In 1351 the Venetian government outlawed spreading rumors intended
to lower the price of government funds. Bankers
in Pisa, Verona, Genoa and Florence also began trading in government securities
during the 14th century. This was only possible because these were independent
city states not ruled by a duke but a council of influential citizens. Italian
companies were also the first to issue shares. Companies in England and the Low
Countries followed in the 16th century.

The Dutch East India Company (founded in 1602) was the first joint-stock
company to get a fixed capital stock and as a result, continuous trade in company
stock occurred on the Amsterdam Exchange. Soon thereafter, a lively trade in
various derivatives, among which options and repos, emerged on
the Amsterdam market. Dutch traders also pioneered short selling a practice
which was banned by the Dutch authorities as early as 1610.

There are now stock markets in virtually every developed and most developing
economies, with the world's largest markets being in the United States, United
Kingdom, Japan, India, China, Canada, Germany (Frankfurt Stock Exchange),
France, South Korea and the Netherlands.

INFORMATION TECHNOLOGYS ROLE TO REGULATE

STOCK MARKET
In the 21st century the business world is marked by drastic changes. These changes
are paced by continuous innovations in computer & telecommunicating
technologies. The choice of a relevant IT is a crucial decision as it is bound to have
a long term & lasting impact on the future of the enterprise. Up-gradation of
technology helps in increasing productivity, reducing cost & in improving total
quality. IT is being helpful & has a great impact in business.

IT can help to identify the critical areas for competitive advantage of business
organization.

Competitive advantages may be achieved by various techniques is business with

the help of IT.

Helps in managing strategic alignment of critical business process.

Decision-making and operational control by managers has been improved by IT.

IT can help in maintaining the changing relationship with customers, suppliers,

trials, potential new entrants, etc.

IT in business results in improved communication, decreased costs, reducing

decision making time, monitoring the competitors and better control on
transaction.

IT can be used as innovation in functioning of the complete business system

during strategic business planning.

IT is helpful in increasing the speed of flow of trade, reducing paperwork &

emergence of global financial system.

INFORMATION TECHNOLOGY (IT) SHAPING INDIAN

STOCK MARKET
Traditionally stock trading is done through stock brokers, personally or through
telephones. As number of people trading in stock market increase enormously in
last few years, some issues like location constrains, busy phone lines, miss
communication etc start growing in stock broker offices. Information technology
(stock market software) helps stock brokers in solving these problems with online
stock trading. It is an internet based stock trading facility. Investor can trade shares
through a website without any manual intervention from stock Broker. In this case
these online stock trading companies are stock broker for the investor. They are
registered with one or more Stock Exchanges. Mostly online trading websites in
India trades in BSE and NSE. Installable Software Based Stock Trading Terminals
and Web (Internet) Based Trading Applications are two different type of trading
environments available for online equity trading.

INDIAN SECURITY MARKET

Primary market

The primary market is that part of the capital markets that deals with the issue of
new securities. Companies, governments or public sector institutions can obtain
funding through the sale of a new stock or bond issue. This is typically done
through a syndicate of securities dealers. The process of selling new issues to
investors is called underwriting. In the case of a new stock issue, this sale is
a public offering. Dealers earn a commission that is built into the price of the
security offering, though it can be found in the prospectus. Primary markets create
long term instruments through which corporate entities borrow from capital
market.

Features of primary markets are:

 This is the market for new long term equity capital. The primary market is the
market where the securities are sold for the first time. Therefore it is also called
the new issue market (NIM).
In a primary issue, the securities are issued by the company directly to
investors.
The company receives the money and issues new security certificates to the
investors.
Primary issues are used by companies for the purpose of setting up new
business or for expanding or modernizing the existing business.
The primary market performs the crucial function of facilitating capital
formation in the economy.
The new issue market does not include certain other sources of new long term
external finance, such as loans from financial institutions. Borrowers in the new
issue market may be raising capital for converting private capital into public
capital; this is known as "going public."
Secondary market
The secondary market, also known as the aftermarket, is the financial market
where previously issued securities and financial instruments such as stock, bonds,
options, and futures are bought and sold. The term "secondary market" is also used
to refer to the market for any used goods or assets, or an alternative use for an
existing product or asset where the customer base is the second market (for
example, corn has been traditionally used primarily for food production and
feedstock, but a "second" or "third" market has developed for use in ethanol
production). Stock exchange and over the counter markets.

With primary issuances of securities or financial instruments, or the primary

market, investors purchase these securities directly from issuers such as
corporations issuing shares in an IPO or private placement, or directly from the
federal government in the case of treasuries. After the initial issuance, investors
can purchase from other investors in the secondary market.

The secondary market for a variety of assets can vary from loans to stocks, from
fragmented to centralized, and from illiquid to very liquid. The major stock
exchanges are the most visible example of liquid secondary markets - in this case,
for stocks of publicly traded companies. Exchanges such as the New York Stock
Exchange, Nasdaq and the American Stock Exchange provide a centralized, liquid
secondary market for the investors who own stocks that trade on those exchanges.
Most bonds and structured products trade over the counter, or by phoning the
bond desk of ones broker-dealer. Loans sometimes trade online using a Loan
Exchange

Money market
As money became a commodity, the money market became a component of
the financial markets for assets involved in short-term borrowing, lending, buying
and selling with original maturities of one year or less. Trading in the money
markets is done over the counter and is wholesale. Various instruments exist, such
as Treasury bills, commercial paper, bankers' acceptances, deposits, certificates of
deposit, bills of exchange, repurchase agreements, federal funds, and short-
lived mortgage-, and asset-backed securities. It provides liquidity funding for the
global financial system. Money markets and capital markets are parts of financial
markets. The instruments bear differing maturities, currencies, credit risks, and
structure. Therefore they may be used to distribute the exposure.

Participants
The money market consists of financial institutions and dealers in money or credit
who wish to either borrow or lend. Participants borrow and lend for short periods
of time, typically up to thirteen months. Money market trades in short-
term financial instruments commonly called "paper." This contrasts with
the capital market for longer-term funding, which is supplied by bonds and equity.

The core of the money market consists of interbank lendingbanks borrowing and
lending to each other using commercial paper, repurchase agreements and similar
instruments. These instruments are often benchmarked to (i.e. priced by reference
to) the London Interbank Offered Rate (LIBOR) for the appropriate term and
currency.

Finance companies typically fund themselves by issuing large amounts of asset-

backed commercial paper (ABCP) which is secured by the pledge of eligible assets
into an ABCP conduit. Examples of eligible assets include auto loans, credit card
receivables, residential/commercial mortgage loans, mortgage-backed
securities and similar financial assets. Certain large corporations with strong credit
ratings, such as General Electric, issue commercial paper on their own credit.
Other large corporations arrange for banks to issue commercial paper on their
behalf via commercial paper lines.

In the United States, federal, state and local governments all issue paper to meet
funding needs. States and local governments issue municipal paper, while the US
Treasury issues Treasury bills to fund the US public debt:

Trading companies often purchase bankers' acceptances to be tendered for

payment to overseas suppliers.
Retail and institutional money market funds
Banks
 Central banks
Cash management programs
Merchant banks

Functions of the money market

1. Financing Trade:

Money Market plays crucial role in financing both internal as well as international
trade. Commercial finance is made available to the traders through bills of
exchange, which are discounted by the bill market. The acceptance houses and
discount markets help in financing foreign trade.

2. Financing Industry:

Money market contributes to the growth of industries in two ways:

(a) Money market helps the industries in securing short-term loans to meet their
working capital requirements through the system of finance bills, commercial
papers, etc.

(b) Industries generally need long-term loans, which are provided in the capital
market. However, capital market depends upon the nature of and the conditions in
the money market. The short-term interest rates of the money market influence the
long-term interest rates of the capital market. Thus, money market indirectly helps
the industries through its link with and influence on long-term capital market.

3. Profitable Investment:

Money market enables the commercial banks to use their excess reserves in
profitable investment. The main objective of the commercial banks is to earn
income from its reserves as well as maintain liquidity to meet the uncertain cash
demand of the depositors. In the money market, the excess reserves of the
commercial banks are invested in near-money assets (e.g. short-term bills of
exchange) which are highly liquid and can be easily converted into cash. Thus, the
commercial banks earn profits without losing liquidity.

4. Self-Sufficiency of Commercial Bank:

Developed money market helps the commercial banks to become self-sufficient. In

the situation of emergency, when the commercial banks have scarcity of funds,
they need not approach the central bank and borrow at a higher interest rate. On the
other hand, they can meet their requirements by recalling their old short-run loans
from the money market.

5. Help to Central Bank:

Though the central bank can function and influence the banking system in the
absence of a money market, the existence of a developed money market smoothens
the functioning and increases the efficiency of the central bank.

Money market helps the central bank in two ways:

(a) The short-run interest rates of the money market serves as an indicator of the
monetary and banking conditions in the country and, in this way, guide the central
bank to adopt an appropriate banking policy,

(b) The sensitive and integrated money market helps the central bank to secure
quick and widespread influence on the sub-markets, and thus achieve effective
implementation of its policy.

Common money market instruments[edit]

Certificate of deposit - Time deposit, commonly offered to consumers by

banks, thrift institutions, and credit unions.
 Repurchase agreements - Short-term loansnormally for less than two weeks
and frequently for one dayarranged by selling securities to an investor with
an agreement to repurchase them at a fixed price on a fixed date.
Commercial paper - short term usanse promissory notes issued by company at
discount to face value and redeemed at face value
Eurodollar deposit - Deposits made in U.S. dollars at a bank or bank branch
located outside the United States.
Federal agency short-term securities - (in the U.S.). Short-term securities issued
by government sponsored enterprises such as the Farm Credit System,
the Federal Home Loan Banks and the Federal National Mortgage Association.
Federal funds - (in the U.S.). Interest-bearing deposits held by banks and other
depository institutions at the Federal Reserve; these are immediately available
funds that institutions borrow or lend, usually on an overnight basis. They are
lent for the federal funds rate.
Municipal notes - (in the U.S.). Short-term notes issued by municipalities in
anticipation of tax receipts or other revenues.
Treasury bills - Short-term debt obligations of a national government that are
issued to mature in three to twelve months.
Money funds - Pooled short maturity, high quality investments which buy
money market securities on behalf of retail or institutional investors.
Foreign exchange swaps - Exchanging a set of currencies in spot date and the
reversal of the exchange of currencies at a predetermined time in the future.
Short-lived mortgage- and asset-backed securities

Discount and accrual instruments

There are two types of instruments in the fixed income market that pay the interest
at maturity, instead of paying it as coupons. Discount instruments, like
repurchase agreements, are issued at a discount of the face value, and their
maturity value is the face value. Accrual instruments are issued at the face value
and mature at the face value plus interest.

Capital market

Modern capital markets are almost invariably hosted on computer-based electronic

trading systems; most can be accessed only by entities within the financial sector
or the treasury departments of governments and corporations, but some can be
accessed directly by the public. There are many thousands of such systems, most
serving only small parts of the overall capital markets. Entities hosting the systems
include stock exchanges, investment banks, and government departments.
Physically the systems are hosted all over the world, though they tend to be
concentrated in financial centres like London, New York, and Hong Kong. Capital
markets are defined as markets in which money is provided for periods longer than
a year.

A key division within the capital markets is between the primary

markets and secondary markets. In primary markets, new stock or bond issues are
sold to investors, often via a mechanism known as underwriting. The main entities
seeking to raise long-term funds on the primary capital markets are governments
(which may be municipal, local or national) and business enterprises (companies).
Governments tend to issue only bonds, whereas companies often issue either
equity or bonds. The main entities purchasing the bonds or stock include pension
funds, hedge funds, sovereign wealth funds, and less commonly wealthy
individuals and investment banks trading on their own behalf. In the secondary
markets, existing securities are sold and bought among investors or traders, usually
on an exchange, over-the-counter, or elsewhere. The existence of secondary
markets increases the willingness of investors in primary markets, as they know
they are likely to be able to swiftly cash out their investments if the need arises.

A second important division falls between the stock markets (for equity securities,
also known as shares, where investors acquire ownership of companies) and
the bond markets (where investors become creditors)

Difference between money markets and capital markets

The money markets are used for the raising of short term finance, sometimes for
loans that are expected to be paid back as early as overnight. Whereas the capital
markets are used for the raising of long term finance, such as the purchase of
shares, or for loans that are not expected to be fully paid back for at least a year.

Funds borrowed from the money markets are typically used for general operating
expenses, to cover brief periods of illiquidity. For example a company may have
inbound payments from customers that have not yet cleared, but may wish to
immediately pay out cash for its payroll. When a company borrows from the
primary capital markets, often the purpose is to invest in additional physical capital
goods, which will be used to help increase its income. It can take many months or
years before the investment generates sufficient return to pay back its cost, and
hence the finance is long term.

Together, money markets and capital markets form the financial markets as the
term is narrowly understood. The capital market is concerned with long term
finance. In the widest sense, it consist of a series of channels through which the
savings of the community are made available for industrial and commercial
enterprises and public authorities.

Capital controls
Capital controls are measures imposed by a state's government aimed at
managing capital account transactions - in other words, capital market transactions
where one of the counter-parties involved is in a foreign country. Whereas
domestic regulatory authorities try to ensure that capital market participants trade
fairly with each other, and sometimes to ensure institutions like banks don't take
excessive risks, capital controls aim to ensure that the macroeconomic effects of
the capital markets don't have a net negative impact on the nation in question. Most
advanced nations like to use capital controls sparingly if at all, as in theory
allowing markets freedom is a win-win situation for all involved: investors are free
to seek maximum returns, and countries can benefit from investments that will
develop their industry and infrastructure. However sometimes capital market
transactions can have a net negative effect - for example, in a financial crisis, there
can be a mass withdrawal of capital, leaving a nation without sufficient foreign
currency to pay for needed imports. On the other hand, if too much capital is
flowing into a country, it can push up inflation and the value of the nation's
currency, making its exports uncompetitive. Some nations such as India have also
used capital controls to ensure that their citizens' money is invested at home, rather
than abroad.

ROLE OF INFORMATION TECHNOLOGY (DEMAT)

In India, shares and securities are held electronically in a Dematerialized (or

"Demat") account, instead of the investor taking physical possession of
certificates. A Dematerialized account is opened by the investor while
registering with an investment broker (or sub-broker). The Dematerialized
account number is quoted for all transactions to enable electronic settlements
of trades to take place. Every shareholder will have a Dematerialized account
for the purpose of transacting shares.

Access to the Dematerialized account requires an internet password and a

transaction password. Transfers or purchases of securities can then be initiated.
Purchases and sales of securities on the Dematerialized account are automatically
made once transactions are confirmed and completed.

Goal of Demat System

India adopted the Demat System for electronic storing, wherein shares and
securities are represented and maintained electronically, thus eliminating the
troubles associated with paper shares. After the introduction of the depository
system by the Depository Act of 1996, the process for sales, purchases and
transfers of shares became significantly easier and most of the risks associated with
paper certificates were mitigated.

Demat benefits

Easy and convenient way to hold securities

Immediate transfer of securities
No stamp duty on transfer of securities
Safer than paper-shares (earlier risks associated with physical certificates such
as bad delivery, fake securities, delays, thefts etc. are mostly eliminated)
Reduced paperwork for transfer of securities
Reduced transaction cost
 No "odd lot" problem: even one share can be sold
Change in address recorded with a DP gets registered with all companies in
which investor holds securities eliminating the need to correspond with each of
them separately.
Transmission of securities is done by DP, eliminating the need for notifying
companies.
Automatic credit into demat account for shares arising out of bonus/split,
consolidation/merger, etc.
A single demat account can hold investments in
both equity and debt instruments.
Traders can work from anywhere (e.g. even from home).
Benefit to the company

The depository system helps in reducing the cost of new issues due to lower
printing and distribution costs. It increases the efficiency of the registrars and
transfer agents and the secretarial department of a company. It provides better
facilities for communication and timely service to shareholders and investors.

Benefit to the investor

The depository system reduces risks involved in holding physical certificates, e.g.,
loss, theft, mutilation, forgery, etc. It ensures transfer settlements and reduces
delay in registration of shares. It ensures faster communication to investors. It
helps avoid bad delivery problems due to signature differences, etc. It ensures
faster payment on sale of shares. No stamp duty is paid on transfer of shares . It
provides more acceptability and liquidity of securities.

Benefits to brokers
 It reduces risks of delayed settlement. It ensures greater profit due to increase in
volume of trading. It eliminates chances of forgery or bad delivery. It increases
overall trading and profitability. It increases confidence in their investors.

ADVANTAGES AND DISADVANTAGES OF IT IN STOCK MARKET

Even if your business is suited to flotation, it may not be the right choice for you.
Being a public company can present a range of benefits to your business, but there
are also issues that might require careful consideration.
The benefits of stock market flotation could include:
giving access to new capital to develop the business
making it easier for you and other investors - including venture capitalists - to
realise their investment
allowing you to offer employees extra incentives by granting share options - this
can encourage and motivate your employees to work towards long-term goals
placing a value on your business
increasing your public profile, and providing reassurance to your customers and
suppliers
allowing you to do business - eg acquisitions - by using quoted shares as currency
creating a market for the company's shares
However, you should also consider the following potential problems:
Market fluctuations - your business may become vulnerable to market
fluctuations beyond your control - including market sentiment, economic
conditions or developments in your sector.
Cost - the costs of flotation can be substantial and there are also ongoing costs of
being a public company, such as higher professional fees.
 Responsibilities to shareholders - in return for their capital, you will have to
consider shareholders' interests when running the company - which may differ
from your own objectives.
The need for transparency - public companies must comply with a wide range of
additional regulatory requirements and meet accepted standards of corporate
governance including transparency, and needing to make announcements about
new developments.
Demands on the management team - managers could be distracted from running
the business during the flotation process and through needing to deal with investors
afterwards.
Investor relations - to maximize the benefits of being a public company and
attract further investor interest in shares, you will need to keep investors informed.
Employees may become demotivated - if shares are only offered to selected
employees, there could be resentment. Shareholding employees could feel that
there is little left to work for if they are sitting on valuable shares

Development of Securities Market

A satisfactory pace of economic growth in any economy is contingent

upon availability of adequate capital. A well-developed securities market, while

acting as provider of funding for economic activity at macro level, plays the

specific roles in an economy, viz., diffusing stress on the banking sector by

diversifying credit risk across the economy; supplying funds for long-term

investment needs of the corporate sector; providing market-based sources of

funds for meeting governments financing requirements; providing products

with flexibility to meet the specific needs of investors and borrowers; and

allocating capital more efficiently.

The main impulse for developing securities markets, including both

equity and debt segments, depends on country-specific histories and more

specifically, in the context of the financial system, it relates to creating more

complete financial markets, avoiding banks from taking on excessive credit, risk

diversification in the financial system, financing government deficit, conducting

monetary policy, sterilising capital inflows and providing a range of long-term

assets. Prior to the early 1990s, most of the financial markets in India faced

controls of pricing, entry barriers, transaction restrictions, high transaction costs

and low liquidity. A series of reforms were undertaken since the early 1990s so

as to develop the various segments of financial markets by phasing out

administered pricing system, removing barrier restrictions, introducing new

instruments, establishing institutional framework, upgrading technological

infrastructure and evolving efficient, safer and more transparent market

practices.

Against this backdrop, this paper essentially brings to the fore the

evolutionary process that has occurred in the securities markets in India along

with an assessment of the impact of reform. Following this introduction, section

II and III set out the developments in corporate equity and debt markets,

respectively. Section IV discusses the developments in the Government securities

market. The paper concludes with a broad assessment of the developments in the

securities markets and outlines the way forward for bringing the Indian

securities market on par with international counterparts.

Conclusion

Companies come to the stock market in a variety of different ways and for
a variety of reasons.
As a private investor, you can sometimes get an allocation of newly-issued
shares, but often the issue will be confined to institutional investors. With
internet shares, and the movement towards direct online IPOs, this may
change for the better.
Most of the time you will be trading in a company's ordinary shares on
the secondary market.
Companies issue other types of share - notably preference shares,
convertibles, and warrants - and even if you don't own them they may have
an effect on your dividend entitlement if they dilute earnings.
A scrip issue is designed to improve marketability of ordinary shares, and
does not dilute your ownership.
A rights issue is designed to raise more money for the company, and
existing shareholders will be invited to buy first. You have a choice about
whether to exercise your rights, but if you do not, your ownership may be
diluted.