Ch.4 Stock Exchanges

SSBES ITM, Nanded
BBA III Sem.

Financial Management (FM)
Ch. 4 Stock Exchanges
By Dr. Mohammed Ahmed
YASH, an Institute for MBA Entrance (CAT, CET, etc.), MCA Entrance & banking Exams Since 2009
Stock Exchange
 A stock exchange is an important factor in the capital market. It is a secure place where
trading is done in a systematic way.
 Here, the securities are bought and sold as per well-structured rules and regulations. Securities
mentioned here includes debenture and share issued by a public company that is correctly
listed at the stock exchange, debenture and bonds issued by the government bodies,
municipal and public bodies.
 Typically bonds are traded Over-the-Counter (OTC), but a few corporate bonds are sold in a
stock exchange. It can enforce rules and regulation on the brokers and firms that are enrolled
with them. In other words, a stock exchange is a forum where securities like bonds and stocks
are purchased and traded. This can be both an online trading platform and offline (physical
location).
YASH, an Institute for MBA Entrance (CAT, CET, etc.), MCA Entrance & Banking Exams Since 2009
Objectives of Stock Exchange
 To Qualify for Long-term Financing

 Commercial banks provide short-term loans most of the time. Therefore, the stock market
serves as a source of long-term funding. If a firm want to list its shares on a stock exchange, it
must adhere to the following laws and regulations.
 To Raise Capital
 The primary function of a stock exchange is to assist companies raise capital. It was establish to
provide the necessary funds for the country’s enterprises to operate.
 In order to achieve this objective, a private corporation will typically distribute stock
certificates to the general public. By selling more shares of stock, the corporation can increase
its capital by raising more funds.
 To Protect Fraudulently
 In addition, it prevents fraud. The norms and regulations of a stock exchange
are always strictly adher to. With these laws and restrictions, it may be able to
prevent excessive trading in securities and price fluctuations.
 The government also has the authority to control and monitor the stock
market. In this approach, unscrupulous individuals could take advantage of
less-savvy investors, and it is up to the stock to prevent this from happening.
 Increasing the Efficiency of Trades

 Trading stocks and other investment vehicles becomes much simpler when
govern by laws. Without this closely controlled and well-coordinated stock
market, it would be impossible to trade equities globally.
 Using the stock exchange, anyone or any firm can purchase or sell stock in
another company. There are millions of separate transactions occurring with
the shares of thousands of different companies at any given time. As a global
trading platform, the stock market facilitates communication between buyers
and sellers by serving as a bridge.
 To Conduct Honest and Operation

 People created the stock market to make purchasing and selling
financial assets simpler and less time-consuming. With the assistance of a stock
market, investment capital is channel into more productive industries.
 If a company has strong outcomes and a great deal of potential, it will have
no trouble obtaining financing. Thus, it is the responsibility of stock exchanges
to safeguard the interests of both lenders and investors.
 Regulation and Control of the Market

 Government agencies and officials collaborate closely and effectively with
stock markets. Unregulated markets may be detrimental to the generation of
new capital.
 Another objectives of stock exchange is the restrictions being implement in this
industry. It is to prevent people from engaging in unlawful activities on the
stock market. The stock market promotes capital growth by ensuring investor
safety and fostering an environment that values transparency.
 Expansion of the Economy

 Giving money to firms accelerates economic expansion. When markets are not
controlled, capital formation might be hindered. Because stock markets are govern
by so many rules; it is conceivable for trade contracts between strangers from distant
regions of the world to be honour. This is one of the primary objectives of the stock
market.
 Teach Individuals to Save Money
 People are more willing to save their money if they believe they can profit from it. With
the use of a stock market, you may determine the value of a variety of assets. The
frequent buying and selling on a stock exchange allows for the estimation of a
security’s price.
Functions of Stock Exchange
 Role of an Economic Barometer: Stock exchange serves as an economic barometer

that is indicative of the state of the economy. It records all the major and minor
changes in the share prices. It is rightly said to be the pulse of the economy, which
reflects the state of the economy.
 Valuation of Securities: Stock market helps in the valuation of securities based on the
factors of supply and demand. The securities offered by companies that are
profitable and growth-oriented tend to be valued higher. Valuation of securities helps
creditors, investors and government in performing their respective functions.
 Transactional Safety: Transactional safety is ensured as the securities that are traded in
the stock exchange are listed, and the listing of securities is done after verifying the
company’s position. All companies listed have to adhere to the rules and regulations
as laid out by the governing body.
 Contributor to Economic Growth: Stock exchange offers a platform for trading

of securities of the various companies. This process of trading involves
continuous disinvestment and reinvestment, which offers opportunities for
capital formation and subsequently, growth of the economy.
 Making the public aware of equity investment: Stock exchange helps in
providing information about investing in equity markets and by rolling out new
issues to encourage people to invest in securities.
 Offers scope for speculation: By permitting healthy speculation of the traded
securities, the stock exchange ensures demand and supply of securities and
liquidity.
 Facilitates liquidity: The most important role of the stock exchange is in

ensuring a ready platform for the sale and purchase of securities. This gives
investors the confidence that the existing investments can be converted into
cash, or in other words, stock exchange offers liquidity in terms of investment.
 Better Capital Allocation: Profit-making companies will have their shares traded
actively, and so such companies are able to raise fresh capital from the equity
market. Stock market helps in better allocation of capital for the investors so
that maximum profit can be earned.
 Encourages investment and savings: Stock market serves as an important
source of investment in various securities which offer greater returns. Investing
in the stock market makes for a better investment option than gold and silver.
Bombay Stock Exchange (BSE)
 Established in 1875 as the Native Share and Stock Brokers'

Association, the Bombay Stock Exchange (BSE) is Asia's first
exchange and the largest securities market in India.
 The BSE has been instrumental in developing India's capital markets
by providing an efficient platform for the Indian corporate sector to
raise investment capital.
Bombay Stock Exchange (BSE)
 The BSE is known for its electronic trading system that provides fast
and efficient trade execution.
 The BSE enables investors to trade in equities, currencies, debt
instruments, derivatives, and mutual funds.
 The BSE also provides other important capital market trading
services such as risk management, clearing, settlement, and
investor education.
National Stock Exchange (NSE)
 National Stock Exchange of India Limited is one of the leading stock

exchanges in India, based in Mumbai.
 NSE is under the ownership of various financial institutions such as banks and
insurance companies.
 It is the world's largest derivatives exchange by number of contracts traded
and the third largest in cash equities by number of trades for the calendar year
2022.
 It is one of the largest stock exchanges in the world by market capitalization.
NSE's flagship index, the NIFTY 50, a 50 stock index is used extensively by
investors in India and around the world as a barometer of the Indian capital
market.
 The NIFTY 50 index was launched in 1996 by NSE.
Over-The-Counter Exchange of India (OTCEI)
 The Over-The-Counter Exchange of India (OTCEI) is an Indian electronic stock

exchange composed of small- and mid-cap companies.
 The purpose of the OTCEI is for smaller companies to raise capital, which they
cannot do at the national exchanges due to their inability to meet the
exchange requirements.
 The OTCEI implements specific capitalization rules that make it suited for small-
to medium-sized companies while preventing larger companies from being
listed.
 The key players in the OTCEI include brokers, market makers, custodians, and
transfer agents.
Features of OTCEI
 Stock Restrictions: Stocks that are listed on other exchanges will not be listed
on the OTCEI and, conversely, stocks listed on the OTCEI will not be listed on
other exchanges.
 Minimum Capital Requirements: The requirement for the minimum
issued equity capital is 30 lakh rupees.
 Large Company Restrictions: Companies with issued equity capital of more
than 25 crore rupees.
 Member Base Capital Requirement: Members must maintain a base capital of
4 lakh rupees.
Objectives of OTCEI
Objectives of OTCEI
Objectives of OTCEI
Securities and Exchange Board of India (SEBI)
 SEBI stands for Securities and Exchange Board of India. It is a

statutory regulatory body that was established by the Government
of India in 1992 for protecting the interests of investors investing in
securities along with regulating the securities market.
 SEBI also regulates how the stock market and mutual funds
function.
Objectives of SEBI
1. Investor Protection: This is one of the most important objectives of setting

up SEBI. It involves protecting the interests of investors by providing
guidance and ensuring that the investment done is safe.
2. Preventing the fraudulent practices and malpractices which are related
to trading and regulation of the activities of the stock exchange
3. To develop a code of conduct for the financial intermediaries such as
underwriters, brokers, etc.
4. To maintain a balance between statutory regulations and self
regulation.
Functions of SEBI
 SEBI has the following functions

 1. Protective Function
 2. Regulatory Function
 3. Development Function
Functions of SEBI
 Protective Function: The protective function implies the role that

SEBI plays in protecting the investor interest and also that of other
financial participants. The protective function includes the following
activities.
a. Prohibits insider trading: Insider trading is the act of buying or selling
of the securities by the insiders of a company, which includes the
directors, employees and promoters. To prevent such trading SEBI has
barred the companies to purchase their own shares from the
secondary market.
Functions of SEBI
 Protective Function:
b. Check price rigging: Price rigging is the act of causing unnatural
fluctuations in the price of securities by either increasing or decreasing the
market price of the stocks that leads to unexpected losses for the investors.
SEBI maintains strict watch in order to prevent such malpractices.
c. Promoting fair practices: SEBI promotes fair trade practice and works
towards prohibiting fraudulent activities related to trading of securities.
d. Financial education provider: SEBI educates the investors by conducting
online and offline sessions that provide information related to market
insights and also on money management.
Functions of SEBI
 Regulatory Function: Regulatory functions involve establishment of rules

and regulations for the financial intermediaries along with corporates
that helps in efficient management of the market.
The following are some of the regulatory functions.
a. SEBI has defined the rules and regulations and formed guidelines and
code of conduct that should be followed by the corporates as well as the
financial intermediaries.
b. Regulating the process of taking over of a company.
c. Conducting inquiries and audit of stock exchanges.
d. Regulates the working of stock brokers, merchant brokers.
Functions of SEBI
 Developmental Function: Developmental function refers to the

steps taken by SEBI in order to provide the investors with a
knowledge of the trading and market function. The following
activities are included as part of developmental function.
1. Training of intermediaries who are a part of the security market.
2. Introduction of trading through electronic means or through the
internet by the help of registered stock brokers.
3. By making the underwriting an optional system in order to reduce
cost of issue.
Purpose of SEBI
 The purpose for which SEBI was setup was to provide an environment
that paves the way for mobilsation and allocation of resources.It
provides practices, framework and infrastructure to meet the growing
demand.
 It meets the needs of the following groups:
1. Issuer: For issuers, SEBI provides a marketplace that can utilised for raising
funds.
2. Investors: It provides protection and supply of accurate information that
is maintained on a regular basis.
3. Intermediaries: It provides a competitive market for the intermediaries by
arranging for proper infrastructure.
Structure of SEBI
 SEBI board comprises nine members. The Board consists of the following
members.
 One Chairman of the board who is appointed by the Central
Government of India
 One Board member who is appointed by the Central Bank, that is, the
RBI
 Two Board members who are hailing from the Union Ministry of Finance
 Five Board members who are elected by the Central Government of
India

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SSBES ITM, Nanded

BBA III Sem.

 To Qualify for Long-term Financing

 Increasing the Efficiency of Trades

 To Conduct Honest and Operation

 Regulation and Control of the Market

 Expansion of the Economy

 Role of an Economic Barometer: Stock exchange serves as an economic barometer

 Contributor to Economic Growth: Stock exchange offers a platform for trading

 Facilitates liquidity: The most important role of the stock exchange is in

 Established in 1875 as the Native Share and Stock Brokers'

 National Stock Exchange of India Limited is one of the leading stock

 The Over-The-Counter Exchange of India (OTCEI) is an Indian electronic stock

 SEBI stands for Securities and Exchange Board of India. It is a

1. Investor Protection: This is one of the most important objectives of setting

 SEBI has the following functions

 Protective Function: The protective function implies the role that

 Regulatory Function: Regulatory functions involve establishment of rules

 Developmental Function: Developmental function refers to the

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