By Abhishek Mehra
Let me tell you, I am not a Capital market guru, yet I decided to write this small piece on capital markets and bring it to you in a layman’s language. Now since it’s meant to make the concepts appear easy to understand, I have tried my best to keep the language simple and easy. So let’s begin with an introduction to what a stock market is all about.
STOCK MARKET….. Take my words, it isn’t too complicated!
A stock market is a market in which stock of shares are bought and sold. It is a general term referring to the organized trading of securities in the various market exchanges and the over the counter (OTC) market.
A stock market may be a physical place, sometimes known as a stock exchange, where brokers gather to buy and sell stocks and other securities. The term is also used more broadly to include electronic trading that takes place over computer and telephone lines.
IMPORTANCE OF STOCK MARKET…. Yeah, it is important!
Capital market plays an extremely important role in promoting and sustaining the growth of an economy.
It is an important and efficient medium to channelize and mobilize funds to enterprises, and provide an effective source of investment in the economy. Apart from helping in resource allocation, it also provides a medium for risk management by allowing the diversification of risk in the economy. It also provides a valuable source of external finance.
A well-functioning capital market tends to improve information quality as it plays a major role in encouraging the adoption of stronger corporate governance principles, thus supporting a trading environment, which is founded on integrity.
The existence of deep and broad capital market is absolutely crucial and critical in spurring the growth our country. For a long time, the Indian market was considered too small to warrant much attention.
However, this view has changed rapidly as vast amounts of international investment have poured into our markets over the last decade.
History of Stock Exchanges in India??…. Yes, they too have a history!
Would you believe if I tell you, that in 1860, the exchange flourished with 60 brokers. In fact the ‘Share Mania’ in India began with the American Civil War broke and the cotton supply from the US to Europe stopped.
At the end of the war in 1874, the market found a place in a street (now called Dalal Street). In 1887, “Native Share and Stock Brokers’ Association” was established. In 1895, the exchange acquired a premise in the street which was inaugurated in 1899.
BOMBAY STOCK EXCHANGE- BSE.
I know you have heard BSE, but what is it all about, do you know?
It is a very common name for all traders in the stock market, BSE. You’d be surprised to know that even Bombay Stock Exchange works with a vision, (while most of us do not) the BSE’s vision is ” To Emerge as the premier Indian stock exchange by establishing global benchmarks.”
- The oldest market not only in the country, but also in Asia.
- The early days of BSE was known as “The Native Share & Stock Brokers Association.”
- It was established in the year 1875 and became the first stock exchange in the country to be recognized by the government.
- BSE obtained a permanent recognition from the Government of India under the Securities Contracts (Regulation) Act, 1956.
In the past and even now, it plays a pivotal role in the development of the country’s capital market. This is recognised worldwide and its index, SENSEX, is also tracked worldwide.
BSE Management…. They aren’t any less professional!
Bombay Stock Exchange is managed professionally by a Board of Directors. It comprises of eminent professionals, representatives of Trading Members and the Managing Director. The Board is an inclusive one and is shaped to benefit it from the market intermediaries and participants. The Board exercises complete control and formulates larger policy issues. The day-to-day operations of BSE are managed by the Managing Director and his management team.
NATIONAL STOCK EXCHANGE- NSE
Another one you must have heard about. Now let me introduce NSE to you, in my style… Would you believe if I tell you, National Stock Exchange of India (NSE) was incorporated as a tax-paying company!
At present it is recognised under Securities Contracts (Regulation) Act, 1956 in 1993 as a stock exchange. In June 1994, it commenced operations in the Wholesale Debt Market (WDM). In November, the same year, the Capital Market (Equities) segment commenced operations and the Derivatives segment in June 2000.
Regional Stock Exchanges (RSE)
Yes, even these exist. So do not be surprised at all.
There are 23 stock exchanges in India. Among them two are national level stock exchanges namely Bombay Stock Exchange (BSE) and National Stock Exchange of India (NSE). The rest 21 are Regional Stock Exchanges (RSE).
A few more things I thought about sharing…
So what makes the market move? What takes the stock market up or down the hill?
The companies, in order to raise money for their projects share their capital with public, done through a process called Initial Price Offering. Once the shares have been floated in the market, they are ready to be traded between the existing shareholders and prospective investors. This demand-supply leads to a particular share reinvent its price.
Every transaction in the stock exchange is carried out through licensed members called brokers.
To trade in shares, the investor has to approach a broker. However, since most stock exchange brokers deal in very high volumes, they generally do not entertain small investors.
These brokers have a network of sub-brokers who provide them with orders.
The fundamental of a stock market is that the price of the stocks depends on the total amount of money invested in the market at a given point of time. At a point of time, the market maybe slows as not a lot of investors are pumping money into the market. Or, at other times, the market may be flushed with funds and the people are still injecting more money fueling a price hike.
When a particular stock is being chased with hot money, it’ll shoot up. When people start feeling that it has lost its charm, the price will fall.
The basics of the markets are well known to all, but even then during a Bullish (uphill) phase or a Bearish (downhill) phase the basics are forgotten.
That I feel is one of the wonders of the stock Markets…
