Grade 12 CBSE

Subject: Business Studies

Notes on Chapter 10.2
Trading Procedure on a Stock exchange & SEBI

10.2 Trading Procedure on a Stock Exchange and SEBI

Stock Exchange: Concept
1. Economic Development and Industry

The growth and prosperity of a country are closely linked to the industries
established within it. When a country has many industries, it tends to be wealthier
and more economically developed.

2. Measuring Economic Development

To figure out how economically developed a country is, we often look at its stock
exchanges. The performance of a stock exchange can give us a good idea of the
country’s economic health.

3. Role of Stock Market Indexes

Stock Market Indexes are tools that measure the average value of a group of stocks.
For example, if the prices of the stocks in the index go up, the index goes up. These
indexes provide an overall picture of how well the stock market (and thus the
economy) is doing.

4. Stock Exchange and Development

Stock exchanges are important because they reflect the health of a country's
industries. When industries are doing well, their stock prices go up, and this shows
that the economy is strong. This is why stock exchanges are seen as indicators of
economic development.

5. India's Stock Exchanges

In India, there are four main stock exchanges where people can trade stocks and
other securities. These are places where economic activity is happening through the
buying and selling of financial assets.
Meaning of Stock Exchange
Definition
A stock exchange is a marketplace where people can buy and sell existing financial
assets like shares, bonds, and debentures. It's a platform that connects buyers and
sellers of these financial products.

Secondary Market
The term "secondary market" refers to the fact that the stock exchange deals with
securities that have already been issued by companies. This means that people are
trading financial products that are already in circulation, rather than new ones being
issued for the first time.

Definitions of Stock Exchange

According to Pyle
A stock exchange is defined as a market where securities (like stocks and bonds) that
have already been issued can be bought and sold. People can use this market to
invest (buying securities to hold them for a longer period in the hope their value
increases) or to speculate (buying and selling quickly to try to make a fast profit).

According to the Securities Contracts (Regulation) Act, 1956

The Act defines a stock exchange as any group of people, whether incorporated or
not, set up to help, regulate, or manage the business of buying, selling, or dealing in
securities.

Tool Kit-13
Stock Market Index?
A stock market index is a number that shows the average performance of a
selected group of stocks. It gives us an idea of how the stock market is doing
overall. For example: Sensex in India tracks 30 well-established and financially
sound companies listed on the Bombay Stock Exchange (BSE).
Dow Jones in the USA tracks 30 large, publicly-owned companies trading on the
New York Stock Exchange (NYSE) and the NASDAQ.
Features of Stock Exchange
1) Organised Market
A stock exchange is a highly organized and regulated market. Every stock exchange
has a governing body or management committee that oversees its operations. This
committee ensures that all activities, such as buying and selling of securities, follow
specific rules and guidelines. The purpose is to maintain a fair and orderly market
where investors can trade with confidence.

2) Dealing in Listed Securities

Only those securities that have been officially listed on the stock exchange can be
traded. For a company’s stocks to be listed, the company must meet certain
requirements and agree to specific terms set by the exchange. This listing process
ensures that the companies trading on the exchange are legitimate and have met
high standards of transparency and performance.

3) Dealing only through Authorised Members

Trading on a stock exchange cannot be done directly by just anyone. It must be
conducted through authorized members, known as brokers. These brokers are
registered and licensed to trade on behalf of investors. This ensures that all trades
are conducted legally and that brokers adhere to the rules of the stock exchange.

4) Necessary to Obey the Rules and Bye-laws

Anyone participating in the stock exchange must follow its rules and bye-laws. These
rules are established to ensure fair trading practices, protect investors, and maintain
the integrity of the market. Violating these rules can result in penalties or other
actions by the exchange authorities.

Tool Kits
Sensex (Tool Kit-14)
Sensex is an index that measures the performance of 30 major companies listed on
the Bombay Stock Exchange (BSE). It helps investors understand the overall market
trend—whether the market is generally going up or down.
Listing of Securities (Tool Kit-15)
Before a company's shares can be traded on the stock exchange, the company must
apply and meet certain criteria. This process ensures that only qualified and
transparent companies are listed, providing a level of trust and security for
investors.
Functions of Stock Exchange
The main functions of a stock exchange are as follows:

A. Providing Liquidity and Marketability to Existing Securities

Stock exchanges create a market where existing securities can be bought and sold
easily. This availability of a market makes it possible for investors to quickly buy or sell
their investments, providing liquidity (ease of converting assets to cash) and
marketability (ease of trading).

Current Sources of Instant Information

Stock Exchange Online System and Electronic Trading System
Explanation: Modern stock exchanges use online systems and electronic trading
platforms to provide instant information about stock prices, trades, and market
conditions. These systems make trading more efficient and transparent.

Simplified Example: Think of it like online shopping where you can instantly see the
price and availability of products, place orders, and track them in real-time.

B. Pricing of Securities
Stock exchanges provide a platform where the prices of securities are determined
through the forces of demand and supply. When more people want to buy a security,
its price goes up; when more want to sell, its price goes down. This process is called
price discovery.

Simplified Example: Just like the price of vegetables in a market is determined by how
much people are willing to pay and how much is available, the price of stocks is
determined by how much investors are willing to pay and how many stocks are
available.
 Tool Kits
Instant Information (Tool Kit-16)
Explanation: These systems provide immediate updates on stock prices, helping
investors make quick and informed decisions.

Legal Framework (Tool Kit-17)

Explanation: Stock exchanges operate within a strict legal framework, ensuring that
all activities are regulated, transparent, and fair. This helps in maintaining investor
confidence and market integrity.

C. Safety of Transactions
The stock exchange follows strict rules and regulations to ensure the safety and
legality of transactions. This includes checks on companies before they can list their
securities and ongoing monitoring of trading activities. India, the Securities and
Exchange Board of India (SEBI) monitors and regulates stock exchanges to protect
investors and maintain orderly In markets.

Simplified Example: Like having rules at a game to ensure fair play, the stock
exchange has rules to ensure that all trading is fair and secure.

D. Contributes to Economic Growth:

A stock exchange is a marketplace where people can buy and sell ownership shares in
companies, called securities. This marketplace plays a crucial role in helping the
economy grow. Here's how it works: When investors sell their shares in one company
and use that money to buy shares in another, they are redistributing their savings.
This process of disinvestment (selling shares) and reinvestment (buying new shares)
ensures that money is constantly flowing to different businesses.

When investors move their money, they are effectively channeling their savings into
companies that are considered to be the most promising and productive. This means
that the money is used in ways that help these businesses expand, innovate, and
improve. As a result, these companies can grow, create jobs, and produce goods and
services more efficiently. All of these factors contribute to the overall growth and
health of the economy. This process is known as capital formation, where savings are
turned into investments that fund business activities and drive economic
development.
 E. Spreadin Equity Cult (Stock Exchange and Investor Education)
Stock exchanges often conduct educational programs and workshops to educate
investors about the market, investment strategies, and their rights and
responsibilities.

Simplified Example: Similar to how schools provide education to students, stock

exchanges offer programs to teach investors about trading and investing.

F. Providing Scope for Speculation:

A stock exchange also allows for a certain amount of speculation, which is an
essential aspect of a dynamic and liquid market. Speculation happens when investors
buy securities with the hope of selling them at a higher price in the future to make a
profit. This activity is legal and regulated by laws to ensure fairness and stability in
the market.

Speculation is important because it helps maintain liquidity in the stock market.

Liquidity refers to how easily securities can be bought and sold without causing a
significant change in their price. When there are many speculators in the market,
there are always buyers and sellers available, which helps keep the market active and
prices stable. This continuous trading ensures that prices reflect the current value of
securities accurately, making the market more efficient and attractive to all types of
investors.

Stock Exchanges in India

Here are some of the major stock exchanges in India:

I. BSE (Bombay Stock Exchange)

Website: www.bseindia.com

Address: Mumbai, Maharashtra

Overview: Established in 1875, BSE is Asia's first stock exchange and one of the
world's fastest stock exchanges with a median trade speed of 6 microseconds. It is
known for its electronic trading system, which has replaced the traditional open
outcry system. BSE is also home to the iconic SENSEX index, which tracks the
performance of 30 well-established companies listed on the exchange.
2. Calcutta Stock Exchange Ltd. (CSE)
Website: www.cse-india.com

Address: Kolkata, West Bengal

Overview: The Calcutta Stock Exchange is one of the oldest stock exchanges in India,
established in 1908. It primarily serves the eastern region of India. While it is not as
large as BSE or NSE, CSE plays a vital role in the regional economy, providing a
platform for trading and investment in a variety of securities.

3. Metropolitan Stock Exchange of India Ltd. (MSE)

Website: www.msei.in

Address: Mumbai, Maharashtra

Overview: Established in 2008, the Metropolitan Stock Exchange is one of the newer
exchanges in India. It aims to provide a modern trading platform and focuses on
transparency and investor protection. MSE offers a wide range of products including
equities, debt, and derivatives.

4. National Stock Exchange of India Ltd. (NSE)

Website: www.nseindia.com

Address: Mumbai, Maharashtra

Overview: Founded in 1992, NSE is one of the largest stock exchanges in the world by
market capitalization. It introduced electronic trading in India, significantly improving
efficiency and transparency in the market. NSE is known for its benchmark index, the
NIFTY 50, which tracks the performance of the top 50 companies listed on the
exchange.
 Trading Procedure on a Stock Exchange
1. Selection of a Broker
Why You Need a Broker: You can't buy or sell stocks directly on the stock exchange by
yourself. You need a broker to do it for you.

Registered Broker: Make sure the broker you choose is registered with SEBI
(Securities and Exchange Board of India). SEBI is the authority that regulates the stock
market.

2. The Investor's Agreement and Registration

Broker-Client Agreement: Before you start trading, you need to sign an agreement
with your broker. This is like a contract that lays out the rules and terms of your
relationship with the broker.

• Client Registration Form: You also need to fill out a form with some important
details:
• PAN (Permanent Account Number): This is a unique number that identifies you
for tax purposes. It's mandatory.
• Personal Details: Your date of birth, address, education level, job, and whether
you are an Indian resident or a Non-Resident Indian (NRI).
• Bank Details: Information about your bank account.
• Depository Participant (DP) Details: This is like a bank for your shares. You'll
need an account with a DP to hold your shares.
• Other Broker Details: If you have another broker, mention it here.
• Client Code: The broker will give you a unique code. This code will be used for
all your transactions with this broker.

3. Opening a Demat Account with a Depository

• Demat Account: This is an account where your shares are held in electronic
form. It's called "Demat" short for "Dematerialized".
• Depository Participant (DP): You need to open your Demat account with a DP.
A DP acts like a bank for your shares.
• Bank Account: You also need a regular bank account to handle the money for
buying and selling shares.
4. Placing an Order
• Tell Your Broker: You need to tell your broker what you want to do. For
example, "I want to buy 10 shares of Company XYZ at ₹500 each."
• Order Confirmation Slip: Once your broker places the order, they will give you
a slip that confirms your order.

5. Starting Online Matching

• Online Trading: Your broker connects to the Stock Exchange's system to find a
matching order. This means if you want to buy, they will look for someone
willing to sell at your price.

6. Executing the Order

• Order Execution: If a match is found, your order is executed. This means the
trade is made at the agreed price.
• Trade Confirmation Slip: After the trade is completed, your broker gives you a
slip that confirms the trade details.

7. Issuing a Contract Note

• Contract Note: Within 24 hours of the trade, your broker sends you a Contract
Note. This is an important legal document that includes:
❖ How many shares you bought or sold.
❖ The price per share and the total amount.
❖ The date and time of the trade.
❖ Unique Order Code Number: Each trade gets a unique code that
you can use to reference the transaction in the future.

8. Pay-in Day Working

• Paying for the Shares: You need to pay for the shares you bought or deliver the
shares you sold. This should be done by the pay-in day, which is the deadline
for making payments or delivering shares.
• Contract Note Review: Before you pay, you should check the Contract Note to
ensure all details are correct.
9. Settlement in Progress
• T+2 Settlement: Trades are settled on a T+2 basis, meaning the settlement
happens two business days after the trade date. For example, if you trade on
Monday, the settlement happens on Wednesday.
• Settlement Tasks: On the settlement day, money is exchanged for shares:
• Buyers pay the money.
• Sellers deliver the shares.

10. Delivery of Shares

• Electronic Transfer: The shares you bought are transferred to your Demat
account electronically by the end of the T+2 day.
• Pay-out Day: The money for the shares sold is transferred to your bank
account within 24 hours after the pay-out day.

Depository Services
Introduction to Depository Services
What are Depository Services?:
• Electronic Trading: Instead of using paper certificates, shares are traded
electronically.
• No Physical Transfer: You don’t need to physically handle share certificates.
Everything is done digitally.

How the System Works

Book Entry System:
• Ownership Record: When you buy or sell shares, the change in ownership is
recorded electronically.
• No Paper: There’s no need for physical share certificates, which makes the
process faster and more secure.

Participants in the System:

1. The Depository: This is where your shares are held in electronic form.
2. The Investor: This is you, the person buying or selling shares.
 3. The Depository Participant (DP): The middleman who facilitates transactions
between you and the depository.
4. The Issuing Company: The company that originally issued the shares.

1. The Depository
Definition:

• Electronic Safe: Think of the depository as a digital vault where your shares are
kept safe.
• Book Entries: The depository updates records of who owns what shares
through book entries (digital records).

Depositories in India:
• NSDL (National Securities Depository Limited)
• CDSL (Central Depository Services Limited)

2. The Depository Participant (DP)

Role of the DP:
• Agent of the Depository: The DP works on behalf of the depository to handle
transactions.
• Bridge: The DP acts as a bridge between you (the investor) and the depository.

Functions of a DP:
• Mediate Transactions: Helps you buy and sell shares by connecting you with
the depository and the issuing company.
• Maintain Accounts: Keeps track of the shares you own and updates your
account balance whenever you buy or sell shares.
• Financial Institutions as DPs: Banks, stockbrokers, and other financial
institutions can serve as DPs.
 3. The Investor
Role of the Investor:

• Buying Shares: When you buy shares, they are added to your account
electronically.
• Selling Shares: When you sell shares, they are deducted from your account
and transferred to the buyer.

What You Need to Do:

• Open an Account: You need to open a Demat account with a DP to start
trading shares electronically.
• Trade Shares: Use this account to buy and sell shares without dealing with
paper certificates.

4. The Issuing Company

Role of the Issuing Company:

• Issuing Shares: The company that originally creates and distributes the shares.
• Updating Records: Keeps track of who owns their shares by working with the
depository.
• Handling Transfers: Manages the transfer of shares from one investor to
another through the depository system.

Demat Account
What is a Demat Account?
Demat stands for Dematerialisation.

It is the process of converting physical paper share certificates into electronic format.

Just like a bank account holds money, a Demat account holds shares and securities.
How Does a Demat Account Work?
• Conversion of Shares:
When a company issues shares, they can be held in paper form or electronically.

To convert paper shares to electronic, the company sends a list of shareholders to

depositories (specialized financial institutions).

• Credit of Shares:
Once the shares are converted to electronic form, they are credited to your Demat
account. For example, if you own 10 shares of a company in paper form, after
dematerialisation, you will see 10 shares in your Demat account electronically.

• Transactions:
Buying Shares: When you buy shares, they are added (credited) to your Demat
account electronically.

Selling Shares: When you sell shares, they are subtracted (debited) from your Demat
account electronically.

• Opening a Demat Account:

You need to open a Demat account with a depository participant (DP). DPs are
typically banks, stockbrokers, or financial institutions.

This account functions similarly to a bank account, but instead of money, it holds
your securities.

Benefits of Depository Services and Demat Account

• No Stamp Duty:
Normally, buying and selling physical shares involves paying a stamp duty (a tax).

With electronic shares, there is no stamp duty, reducing your transaction costs.

• Elimination of Risks:
Physical certificates can be lost, stolen, or damaged. Electronic shares don't have
these risks.

You don’t have to worry about keeping physical documents safe.

 • Convenient and Efficient:

Electronic transactions are faster and easier to manage than handling physical paper
certificates.

You can easily manage your investments online from anywhere.

• Increased Liquidity:
Liquidity means how quickly you can buy or sell something without affecting its price.

Electronic shares can be bought or sold quickly, making it easier to manage your
investments.

• Faster Settlement:
Settlement is the process of transferring shares from the seller to the buyer.

With electronic shares, this process is much quicker, usually taking just a couple of
days compared to weeks with physical shares.

• Reduction in Paperwork:
Electronic transactions involve less paperwork, making the process more efficient and
less error-prone.

No need to fill out forms or wait for documents to be mailed.

• Enhanced Security:
Electronic records are securely maintained by depositories, reducing the risk of fraud
or loss.

Your investments are more secure and easier to track.

• Foreign Investment:
The ease and security of electronic transactions attract more foreign investors to the
Indian market.

This brings in more money and helps the economy grow.

 Securities and Exchange Board of India (SEBI)
What is SEBI?
SEBI stands for Securities and Exchange Board of India.

It is the regulatory authority in India that oversees the securities market (stock
market).

History and Establishment

• Formation:

SEBI was initially set up by the Government of India on April 12, 1988, as an Interim
Administrative Body.

Its purpose was to regulate the securities market and protect investors.

• Statutory Powers:
On January 30, 1992, SEBI was given statutory powers, meaning it became an official
legal authority.

This was done through an Act of Parliament called the SEBI Act, 1992.

Objectives of SEBI (Securities and Exchange Board of India)

1. Regulate Stock Exchanges
SEBI keeps a close watch on stock exchanges and the securities industry to ensure
they operate smoothly and fairly.

This includes making sure that all transactions are transparent and conducted
properly.

2. Protect the Investors

SEBI provides guidance and education to help individual investors understand their
rights and protect their investments.

They also address complaints and resolve issues to safeguard investors' interests.

3. Prevent Trading Malpractices

SEBI prevents unfair practices like insider trading, where people use confidential
information to buy or sell stocks to their advantage.
They ensure that trading activities are balanced and fair for all participants by
enforcing rules and regulations.

4. Control over the Intermediaries

SEBI monitors the activities of intermediaries such as brokers, merchant bankers, and
others to ensure they operate in a fair, competitive, and professional manner.

Functions of SEBI
SEBI’s functions can be categorized into three main types:

I. Regulatory Functions
• Registering Entities:
SEBI registers brokers, sub-brokers, and other participants in the stock market.

They also register mutual funds and other collective investment schemes.

• Monitoring Stock Exchanges:

SEBI regulates stock exchanges and other securities markets.

They oversee the trading of stocks and ensure compliance with laws and regulations.

• Inspections and Audits:

SEBI conducts inspections and audits of brokers, stock exchanges, and other entities
to ensure they follow rules and operate fairly.

• Investor Protection:
SEBI regulates the takeover of companies to protect the interests of shareholders.

They also charge fees for carrying out various functions.

II. Developmental Functions

• Training Programs:
SEBI trains intermediaries like brokers and portfolio managers to enhance their skills
and knowledge.

They also educate investors about the market.

 • Research and Publications:
SEBI conducts research and publishes information to keep market participants
informed.

This helps in making the market more transparent and efficient.

• Flexible Policies:
SEBI develops policies to adapt to changing market conditions and to support the
growth of the market.

III. Protective Functions

• Preventing Fraud:
SEBI prohibits fraudulent and unfair trade practices, such as providing false
information to investors.

They ensure that all information provided to investors is accurate and truthful.

• Insider Trading Control:

SEBI monitors and controls insider trading and imposes penalties for violations.

They make sure that no one takes advantage of confidential information for personal
gain.

• Fair Practices:
SEBI promotes fair practices and a code of conduct to maintain the integrity of the
securities market.
Terminology Relating to Stock Exchange/Terms Used in
Stock Exchange Dealings
1. Badla or Contango:
This refers to the extension of the settlement date of a trade. If the buyer cannot pay
by the due date, they can arrange with the financier to extend the date.

2. Bear:
A person who expects the price of stocks to fall and sells their stocks hoping to buy
them back at a lower price.

3. Blue Chip Shares:

Shares of well-established and financially sound companies with a history of reliable
performance.

4. Bourses:
Another name for stock exchanges is bourses.

5. Bull:
A person who expects the price of stocks to rise and buys stocks hoping to sell them
at a higher price.

6. Odd Lots:
Shares that are not traded in standard quantities. For example, if shares are typically
traded in lots of 100, any trade with fewer than 100 shares is considered an odd lot.

7. Dematerialisation (Demat):
The process of converting physical share certificates into electronic form.

8. Sensex:
The stock market index of the Bombay Stock Exchange (BSE), which tracks the
performance of 30 well-established and financially sound companies listed on the
BSE.