Acknowledgement….

The group members gratefully acknowledge the

valuable efforts, suggestions and clarifications
provided by many peoples and library (Khalsa
College) in bringing out this project on Stock
Market. We gratefully acknowledge the valuable
guides and suggestions provided by Mrs. Jeini,
Internet services and newspapers in bring out
this project.

Suggestions for improvement in the contents

and quality of this project would be gratefully
acknowledged.
 DO STOCK EXCHANGE HAS FUTURE?

† What is a stock exchange all about?

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Of all the modern service institutions, stock exchanges are perhaps the
most crucial agents and facilitators of entrepreneurial progress. After
the industrial revolution. As the size of business enterprises grew, it was
no longer possible for proprietors or even partnerships to raise colossal
amounts of money required for undertaking large entrepreneurial
ventures. Such huge requirements of capital could only be met by the
participation of a very large number of investors; their number running
into hundreds, thousands and even millions, depending on the size of
business venture.
In general, small-time proprietors. Or partners of a proprietary or
partnership firm, are likely to find it rather difficult to get out of the
business should they for some reason wish to do so. This is because it is
not always possible to find buyers for an entire business or even a part
of an business, just when one wishes to sell it similarly, it is not easy for
someone with savings, especially with a small amount of savings, to
readily find an appropriate business opportunity, or a part thereof, for
investment. These problems would be even more magnified in larger
proprietorship and partnerships. Nobody would like to invest in such
partnerships in the first place, since once invested, their savings would
be very difficult to convert into cash. And most people do have a lot of
reasons, such as better investment opportunity, marriage, education,
death health, and so on. For wanting to convert their savings into cash.
Clearly then, big enterprises will be able to raise capital from the public
at large, only if there were some mechanism by which the investors
could purchase or sell their share of the business as and when they
wished to do so. This implies that ownership in business has to be
“broken up” into a large number of small units, such that each unit may
be independently and easily bought & sold without hampering the
business ownership would help mobilize small savings in the economy
into entrepreneurial ventures.
This end is achieved in a modern business through the mechanism of
shares. A share represents the smallest recognized fraction of ownership
in a publicly held business each such fraction of ownership is
represented in the form of a certificate, known as the share certificate.
The breaking up of the total ownership of a business into small
fragments, each fragment represented by a share certificate. Enables
them to be easily bought and sold
The institution where this buying & selling of shares essentially takes
place is the stock exchange. In the absence of stock exchanges, i.e.
institutions where small chunks of business could be traded, there
would be no modern business in the form of publicly held companies.
Today, owing to the stock exchanges, we do not have to be electronics
wizards to be owners or part owners in an electronics company ; we can
be part owner of one company today & another company tomorrow ;we
can be part owners in several companies at the same time ; we can be
part owners in the companies at the same time; we can be part owners
in company hundreds or thousands of miles away; we can be all of these
things , and none of them, should we for whatever reason decide to
convert all are ownership stake into cash at short notice. Thus by
enabling the convertibility or ownership in the product market into
financial assets, namely shares, stock exchanges bringing together
buyers & sellers of vegetable comes in vegetable market. And for that
very reason, activities relating to stock exchanges are also appropriately
enough, known as stock market & security market. Also, just as a
vegetable market is distinguished by a specific locality and
characteristics of its own, mostly a stock exchange is also distinguished
by a physical location & characteristics of its own. In fact according to
H.T.parekh, the earliest location of Bombay stock exchange, which for a
long period was known as ‘The native share & stock brokers’
“Association” was probably under a tree around 1870!
2. How are securities traded in stock exchanges?
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Securities are traded in three different ways. In stock exchanges in
India: cash basis settlement basis. Only a few select frequently traded
ordinary shares are eligible for being traded on the settlement basis
there are known as specified shares or shares on specified list or
category a share. In December 1994, there were only about 90 securities
on the specified list in the Bombay stock exchanges (BSE). All other
ordinary shares preference shares, debentures & government securities
have to be traded on cash basis are known as non-specified shares or
category B shares. Category B shares are also said to be on the cash list
& are also known as cash securities. If we look at financial daily, we
would see the price of these two categories of shares listed separately.
Occasionally, for reason which will be described later ,shares may be
moved from the specified list to the cash list and vice versa within a
stock exchange & on cash list in another. However, all the securities
may be traded on spot or cash basis as well.

3. How exactly does the settlement basis of transaction operate?

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Let understand this system, which has been unique to India, in some
detail. Even if we do not participate in this system of trading, knowledge
about the system is essential because it applies to most of the blue chips
in the market and it often sets the mood of the market.
Buying a share on the settlement basis or taking a long position: let us
take a situation where we are convinced that the price of a particular
share listed in the specified category would rise. We would like to buy
the shares but we do not have the crash required for taking delivery of
shares. We could then purchase the share under the settlement system.
Let us work out the cash-flows under two possible scenarios: one in
which the price on the settlement day, also known as settlement price or
the make up price, is higher & another which the price is lower
Than the purchase price of the share:
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Number of shares bought : 100
Purchase price : Rs 50 per share
Price on settlement day : Rs 60 per share

In this case, on the settlement day, if the buyer and the seller decide to
carry the transaction forward, the seller would pay the buyer in the
difference in the price. i.e., Rs 10 per share, & a new transaction price
would be assigned at Rs 60. Since the seller is p-providing the buyer an
implicit loan by not insisting on payment of cash. He would expect to be
compensated for the loss of interest on the money due to him. This is
known as contango, forwardation charge or badla in local parlance. If
the badla charge happens to be about 3% per month, then for a typical
14 days settlement period, the buyer would pay the seller Re 0.90 per
share (15% of RS 60) as the interest. On the loan the buyer would
receive from the seller a total amount of RS 1000 because oh the price
difference and the buyer would pay seller a RS 90 as badla. The net
cash-flow to the buyer during the settlement would be RS 910.
B. The price on the settlement day is lower than the purchase price:
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Number of shares bought : 100
Purchase price : RS 50 per share
Price on settlement day : RS 40 per share

In this case, on the settlement day, if the transaction has been

carried forward, the buyer would have to pay the seller the difference in
the price, i.e., Rs 10 per share, and a new transaction price would be set
at Rs 40. Also, the buyer may have to pay Re 0.60 per share as the
forwardation charge (being 1.5% of Rs 40). Thus, the buyer would pay
in all a total amount of Rs 1060 to the seller; Rs 1000 because of the
price difference, and Rs 60 towards Badla.
When one buys a share on the carry-forward basis,
one is said to be taking a “long position” in the market. In other words,
one is a “Bull”.
GURU N
MATUNG
C

This is