BASICS ABOUT SHARE TRADING IN STOCK EXCHANGES &
NATIONAL- INTERNATIONAL STOCK EXCHANGES
INTRODUCTION
Stock exchange is that place where investors can
buy and sell stocks. A company makes issue and
redemption of securities and other financial
instruments, and also makes capital events including
the payment of income and dividends only through
Stock Exchange. Securities
traded on a stock exchange
include shares issued by
companies, unit trusts,
derivatives, pooled
investment products and
bonds. To be able to trade a security on a certain
stock exchange, it must be listed there. Stock
exchanges are part of a global market for securities.
TRADING SYSTEM OF STOCK EXCHANGE
Market is divided into two parts namely:
 Primary Market
 Secondary Market
Listing of Shares for first public offering is known as
Initial Public Offering (IPO). First issue or IPO is made
only through Primary Market. Primary Market also
includes issue of further capital by companies whose
shares are already listed on the stock exchange.
Secondary Market is a market in which an investor
purchases a security from another investor rather
than the issuer, subsequent to the original issuance
ANKIT MITTAL
in the primary market. Securities and Exchange
Board of India (SEBI) regulates Primary Market,
Secondary Market.
PRICING SYSTEM:
The PRICE at which each buying and selling
transaction takes is determined by the demand and
supply for a particular stock.
Let us take an example for a
better understanding of
how demand and supply
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. Trade on an exchange is by
members only. There is usually no compulsion to
issue stock via the stock exchange itself, nor must
stock be subsequently traded on the exchange. Such
trading is said to be off exchange or over-the-
counter. This is the usual way that derivatives and
bonds are traded.
SENSEX
Sensex stands for “sensitive index”; it represents BSE Formula for Sensex
(Bombay Stock Exchange). SENSEX = (sum of free float market cap of 30 major
Sensex indicates all major companies of BSE) * Index value in 1978-79 / Market
companies of BSE. Sensex is cap value in 1978-79.
calculated using share prices of Example: suppose BSE index (SENSEX) consist of only
30 major companies which are two stocks such as ‘X’ and ‘Y’.
listed in BSE. Company ‘X’ has 1000 outstanding shares out of
which only 500 are available for trading in open
NIFTY market. Market price of share is Rs.100.
Nifty indicates NSE; it is the leading index for large Company ‘Y’ has 2000 outstanding shares out of
companies in the NSE of India. It consists of 50 which 1000 shares are held by promoters and
companies representing 24 sectors of the economy. remaining 1000 are free float shares (open market
NIFTY represents approximately 47% of the traded shares). Market price of share is Rs.50.
value of all stocks on the National Stock Exchange. It
is calculated using base year 1995 and base index Calculation of Market Capitalization
value 1000. Stock Issued Stocks Market price Market Cap.
X 1000 100 100000
STOCK MARKET INDEX Y 2000 50 100000
Index Represents entire stock market, movements in
index represents average return obtained by Calculation of Free Float market capitalization
investors in stock markets. When the index goes up, Stock Open Market Market Market
the market thinks that the future returns will be Stocks price Cap.
higher than they are at present and vice versa. X 500 100 50000
Y 1000 50 50000
Market Capitalization
Market capitalization is the total worth of all Here;
outstanding (issued) shares of a company. It Sum of free float market cap of company X and
represents the total worth of a company. company Y is 50000+50000 = 100000
Market capitalization= No of shares outstanding x Assume market cap during 1978-79 is 25000
market price of share
Now apply formula;
Free Float Market Capitalization 100000*100/25000 = 400
Free float market capitalization is the total worth of The same method is used to calculate NSE nifty but
all shares of a company which are available for includes two major changes. Base year is 1995 and
trading in the open market. base value (index value) is 1000. Nifty represents
stocks of 50 major companies of NSE.
Calculation of SENSEX and NIFTY
Sensex calculation is practiced since 1986. Initially it Formula for NIFTY
had been calculated using total market capitalization
NIFTY = (Sum of free flow market cap of 50 major
method but the methodology changed to free float
stocks of NSE) X Index value in 1995 / market cap
market capitalization since from 2003. Hence these
value in 1995.
days Sensex is calculated using free float market
capitalization of 30 major BSE listed companies and
by using base value 100 (1978-79). SENSEX is
calculated for every 15 seconds.
HISTORY OF STOCK EXCHANGES:
In this article we will look at the evolution of stock
exchanges, from the Venetian slates, to the British
coffeehouses, NYSE, NASDAQ, BSE, NSE etc.
In the 1300s, the Venetians were the leaders
in the field and the first to start trading the securities
from other governments. They would carry slates
with information on the various issues for sale and
meet with clients much like a broker does today.
The First Stock Exchange - Sans the Stock
Belgium boasted a stock exchange as far back as
1531, in Antwerp. Brokers and moneylenders would
meet there to deal in business, government and even
individual debt issues.
In the 1600s, the Dutch, British, and French
governments all gave charters to companies with
East India in their names. On the cusp of
imperialism's high point, it seems like everyone had
a stake in the profits from the East Indies and Asia
except the people living there. Sea voyages that
brought back
goods from the
East were
extremely risky -
on top of
Barbary pirates,
there were the
more common
risks of weather
and poor
navigation.
In order to
lessen the risk of a lost ship ruining their fortunes,
ship owners had long been in the practice of seeking
investors who would put up money for the voyage -
outfitting the ship and crew in return for a
percentage of the proceeds if the voyage was
successful. These early limited liability companies
often lasted for only a single voyage. They were then
dissolved, and a new one was created for the next
voyage. Investors spread their risk by investing in
several different ventures at the same time, thereby
playing the odds against all of them ending in
disaster. Because the shares in the various East India
companies were issued on paper, investors could
sell the papers to other investors. Unfortunately,
there was no stock exchange in existence, so the
investor would have to track down a broker to carry
out a trade. In England, most brokers and investors
did their business in the various coffee shops
around London.
The first stock exchange in London
was officially formed in 1773, a scant 19 years
before the New York Stock Exchange. Whereas the
London Stock Exchange (LSE) was handcuffed by the
law restricting shares, the New York Stock Exchange
has dealt in the trading of stocks, for better or
worse, since its inception. The NYSE wasn't the first
stock exchange in the U.S., however, that honor
goes to the Philadelphia Stock Exchange, but it
quickly became the most powerful. Formed by
brokers under the spreading boughs of a
buttonwood tree, the New York Stock Exchange
made its home on Wall Street.
History of the Indian Stock Market - The Origin
The Indian Stock Markets has a very old history.
Trading list by the end of 1839 got broader. Rapid
development of commercial enterprise saw
brokerage business attracting more people into the
business. In 1860 the number of brokers increased to
60. In 1860-61 American Civil War broke out which
caused a stoppage of cotton supply from USA
marking the beginning of the "Share Mania" in India
& number of brokers increased to about 200 to 250
in 1861-62. 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). 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. In 1875 "The Native
Share and Stock Brokers' Association" (also known as
"The Bombay Stock Exchange") was established in
Bombay. After that many stock markets established
in India before Independence & after Independence.
In 1894 "The Ahmedabad Share and Stock Brokers'
Association" was established. In 1908 "The Calcutta
Stock Exchange Association" was formed. In 1920
Madras witnessed boom and business at "The
Madras Stock Exchange" was transacted with 100 NATIONAL STOCK EXCHANGE (NSE):
brokers. In 1923 when recession followed, number of
brokers came down to 3 and the Exchange was The National Stock Exchange of India was promoted
closed down. In 1934 Establishment of the Lahore by leading financial
Stock Exchange. In institutions at the
1936 Merger of the behest of the
Lahore Stock
Government of
Exchange with the
India, and was
Punjab Stock
Exchange. In 1940 incorporated in
Uttar Pradesh Stock November 1992 as
Exchange Limited and a tax-paying company. In April 1993, it was
Nagpur Stock recognized as a stock exchange under the Securities
Exchange Limited was established. Establishment of Contracts (Regulation) Act, 1956. NSE commenced
"The Hyderabad Stock Exchange Limited" in 1944. In
operations in the Wholesale Debt Market (WDM)
1947 "Delhi Stock and Share Brokers' Association
Limited" and "The Delhi Stocks and Shares Exchange segment in June 1994. Key People of NSE is Mr. Ravi
Limited" were established and later on merged into Narain (MD). No. of listing about 1,512. Market Cap
"The Delhi Stock Exchange Association Limited". US$1.54 trillion (Sep 2010). Indexes used are S&P CNX
Lahore Stock Exchange was closed down after the Nifty CNX Nifty Junior
partition of India, and later on merged with the Delhi S&P CNX 500. Website is http://www.nse-india.com
Stock Exchange. Bangalore Stock Exchange Limited
was registered in 1957 and got recognition only by BOMBAY STOCK EXCHANGE (BSE):
1963. Many more stock exchanges were established
during 1980's, namely. Cochin Stock Exchange (1980), The Bombay Stock Exchange is the oldest exchange in
Uttar Pradesh Stock Exchange Association Limited (at Asia. With over 4,990
Kanpur, 1982), Pune Stock Exchange Limited (1982), Indian companies
Ludhiana Stock Exchange Association Limited (1983), listed & over 7700
Gauhati Stock Exchange Limited (1984), Kanara Stock scrips on the stock
Exchange Limited (at Mangalore, 1985), Magadh exchange, it has a
Stock Exchange Association (at Patna, 1986), Jaipur significant trading
Stock Exchange Limited (1989), Bhubaneswar Stock volume. The BSE
Exchange Association Limited (1989), Saurashtra SENSEX (Sensitive
Kutch Stock Exchange Limited (at Rajkot, 1989), index), also called
Vadodara Stock Exchange Limited (at Baroda, 1990), the "BSE 30", is a widely used market index in India
Coimbatore Stock Exchange, Meerut Stock Exchange. and Asia. Though many other exchanges exist, BSE
and the National Stock Exchange of India account for
The two leading stock exchanges in India are Bombay most of the trading in shares in India. Key People of
Stock Exchange (BSE) and National Stock Exchange BSE is Madhu Kannan (CEO & MD). Currency use in
(NSE). A brief about them is as under: Bombay Stock Exchange is Indian Rupees ( ). Market
Cap is about US$1.78 trillion. Volume is about
US$980 billion. Website http://www.bseindia.com
NEW YORK STOCK EXCHANGE:
The New York Stock Exchange (NYSE) is the world's
largest stock exchange
by market
capitalization of its
listed companies at
US$11.92 trillion as of
Aug 2010. Average
daily trading value was
approximately US$153
billion in 2008. The
NYSE is operated by
NYSE Euronext, which
was formed by the
NYSE's 2007 merger with the fully electronic stock
exchange Euronext. The NASDAQ has more
companies listed, but the NYSE has a market
capitalization that is larger than Tokyo, London and
the NASDAQ combined - and the merger with
Euronext will make it larger still. Although the other
stock exchanges in the world have grown stronger
through mergers and the development of their
domestic economies, it is difficult to see how any of
them will dislodge the New York Stock Exchange.
Currency used is United States dollar. No. of listing
2,304. Volume US$17.52 trillion, Indexes used are
NYSE Composite, DowJones Industrial Average.
Website http://www.nyse.com

Prepared By: Ankit Mittal, CRO0224635

Picture & Data Source: Wikipedia.com, Google.com