Month: July 2022

Management Notes

Reward management

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Reward management is concerned with the formulation and implementation of strategies and policies that aim to reward people fairly, equitably and consistently in accordance with their value to the organization.

Reward management consists of analysing and controlling employee remuneration, compensation and all of the other benefits for the employees. Reward management aims to create and efficiently operate a reward structure for an organisation. Reward structure usually consists of pay policy and practices, salary and payroll administration, total reward, minimum wage, executive pay and team reward.

Objective

Reward management deals with processes, policies and strategies which are required to guarantee that the contribution of employees to the business is recognized by all means. Objective of reward management is to reward employees fairly, equitably and consistently in correlation to the value of these individuals to the organization. Reward systems exist in order to motivate employees to work towards achieving strategic goals which are set by entities as well as aligning the actions of employees to reflect the culture, aims and beliefs a business or organisation wishes to uphold. Reward management is not only concerned with pay and employee benefits. It is equally concerned with non-financial rewards such as recognition, training, development and increased job responsibility. Ultimately, Reward Management is a tool that uses various types of Employee Motivation to align the strategic and cultural goals of an employee, or group of employees, with the tactical targets set by a business or organisation.

Rewards

Rewards are more about incentives to your employee’s work. It’s just to motivate them towards the work and promote productivity. To encourage more quality work, you offer them rewards.

Benefits

Benefits are most often not built into one’s salary; for example health insurance offered by the company.

Perks

Perks act as a kind of treat to the employees. It is offered to make their work-life more enjoyable and stable. This could be anything like; Chill Fridays, less-stressful Mondays, and so on.

Stock options

Some organizations offer stocks to their employees at a fixed rate for some time. This is again a great way to motivate employees to stick with the organization in the long term.

Recognition programs

Most of the employees would prefer financial rewards for their efforts towards the company. However, some employees seek recognition for their hard work from the organization.

Important:

Mutually beneficial: A reward system is beneficial not only to the employee but also to the organisation. The employee will feel more motivated to work harder by having a reward system in place the employee will feel more committed to their work and their productivity will increase. An increase in productivity will then benefit the organisation. Therefore, a reward system is mutually beneficial to the employee and the organisation.

Absenteeism: A reward system will reduce absenteeism in the organisation. Employees like being rewarded for a job well done and if there is a reward system in place, employees will be less likely to be ringing in sick and not showing up for work. Also, by having a reward system in place the employees will be clearer about the targets and goals of the organisation as they will be rewarded when reach certain targets. So, by having a reward system as an incentive they will be less likely to be absent from work.

Motivation: A reward system will motivate employees by reaching targets and organisational goals in exchange for rewards. A reward system is great at motivating employees but they will also be motivated to prove themselves to the organisation.

Loyalty: A reward system will increase the employee’s loyalty to the organisation. By a reward system being in place the employee feels valued by the organisation and knows that their opinion matters. If an employee is happy with the reward system, they are more likely to appreciate work place and remain loyal to the organisation

Teamwork: The reward system will increase the teamwork spirit in the organisation. The reward system will promote teamwork to the employees. The employees will work together as part of a team to achieve their targets in return for rewards. Teamwork within the organisation will help increase efficiency and create a happier workplace. This is another reason why reward systems are important in business organisations.

Morale: Having a reward system in place providing employees with incentives and recognition will boost their morale. By encouraging employees to meet goals and targets it gives them clear focus and purpose which will their morale. By the employees morale being boosted this will increase the morale of the entire organisation. This is all down to a reward system in the organisation.

Management Notes

Assessment of Recruitment Techniques

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Recruitment is a critical function of Human Resource Management (HRM) that involves attracting, identifying, and selecting the right candidates for an organization. Various recruitment techniques are used to source candidates, each with its advantages and limitations. Assessing these techniques ensures that organizations optimize their hiring processes to attract top talent while reducing costs and time-to-hire.

Recruitment techniques can be broadly categorized into internal and external methods. This assessment evaluates various recruitment techniques based on factors like efficiency, cost, suitability, and effectiveness in meeting organizational goals.

Internal Recruitment Techniques:

Internal recruitment focuses on filling vacancies with existing employees through promotions, transfers, or internal job postings.

Promotions and Transfers

  • Advantages:
    • Boosts employee morale and motivation.
    • Saves costs associated with external hiring.
    • Reduces training time since employees are already familiar with the organization.
  • Limitations:
    • Limits the inflow of new ideas and perspectives.
    • May create dissatisfaction among employees who are not promoted.
    • Internal hiring may lead to another vacancy that needs filling.

Employee Referrals

  • Advantages:
    • Faster hiring process as employees recommend candidates they trust.
    • Reduces hiring costs compared to advertisements and job portals.
    • Improves cultural fit since employees refer candidates who align with company values.
  • Limitations:
    • Risk of favoritism and lack of diversity.
    • May not always result in the best-qualified candidates.
    • Employees might expect rewards or incentives for referrals.

Internal Job Postings

  • Advantages:
    • Encourages career growth and internal mobility.
    • Reduces hiring costs and time.
    • Enhances employee engagement and retention.
  • Limitations:
    • Limited talent pool.
    • Might not be suitable for specialized roles requiring external expertise.

External Recruitment Techniques

External recruitment involves sourcing candidates from outside the organization. It is used when internal candidates do not meet the job requirements.

Job Portals and Company Websites

  • Advantages:
    • Provides access to a large talent pool.
    • Cost-effective compared to traditional recruitment methods.
    • Automated screening tools help filter candidates efficiently.
  • Limitations:
    • High volume of applications may lead to difficulty in shortlisting candidates.
    • Some candidates may apply without reading job descriptions properly.

Employment Agencies and Headhunters

  • Advantages:
    • Useful for specialized and executive roles.
    • Saves time as agencies conduct initial screening and interviews.
    • Access to passive candidates who are not actively searching for jobs.
  • Limitations:
    • Expensive compared to direct hiring.
    • Quality of candidates depends on the agency’s expertise.
    • Lack of direct employer-candidate interaction in the early stages.

Campus Recruitment

  • Advantages:
    • Provides fresh talent with innovative ideas.
    • Builds long-term relationships with universities.
    • Cost-effective for entry-level hiring.
  • Limitations:
    • Limited to fresh graduates with no experience.
    • Time-consuming as it involves coordination with educational institutions.
    • High attrition rates among young hires.

Social Media Recruitment (LinkedIn, Facebook, Twitter)

  • Advantages:
    • Access to a global talent pool.
    • Allows direct engagement with candidates.
    • Cost-effective and enhances employer branding.
  • Limitations:
    • Not all professionals actively use social media for job searches.
    • Requires expertise in social media marketing and employer branding.

Newspaper Advertisements

  • Advantages:
    • Suitable for government jobs, blue-collar positions, and public-sector roles.
    • Reaches candidates who may not use digital platforms.
  • Limitations:
    • Expensive compared to online job portals.
    • Limited reach as most job seekers prefer online applications.

Walk-in Interviews

  • Advantages:
    • Quick hiring process.
    • Suitable for bulk hiring in industries like retail, hospitality, and BPOs.
  • Limitations:
    • May not attract highly skilled professionals.
    • High rejection rates due to lack of pre-screening.

Recruitment through Networking and Industry Events

  • Advantages:
    • Helps in hiring professionals with niche expertise.
    • Builds strong industry connections.
  • Limitations:
    • Limited reach as only a few candidates attend such events.
    • Can be time-consuming.

Criteria for Assessing Recruitment Techniques

Organizations assess recruitment techniques based on the following criteria:

A. Cost-Effectiveness

  • Internal hiring and referrals are cost-effective compared to recruitment agencies and advertisements.
  • Digital platforms like LinkedIn and job portals provide cost-efficient hiring options.

B. Speed and Efficiency

  • Walk-in interviews, employee referrals, and job portals help in quick hiring.
  • Employment agencies and headhunters may take longer but provide highly skilled candidates.

C. Quality of Hire

  • Internal recruitment ensures cultural fit but may limit fresh perspectives.
  • External recruitment brings diverse talent but requires a robust screening process.

D. Diversity and Inclusion

  • Social media recruitment and networking events help in diversifying the workforce.
  • Employee referrals may result in homogenous hiring.

E. Retention Rate

  • Candidates hired through referrals and internal job postings tend to stay longer.
  • Fresh graduates from campus recruitment may have higher attrition rates.
Management Notes

SEBI Departments

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The Commodity Derivatives Market Regulation Department is responsible for supervising the functioning and operations of Commodity Derivative Segments of Recognized Stock Exchanges/Recognized Clearing Corporations. The following Divisions will perform the functions of the Department:

  • Division of Exchange Administration.
  • Division of Complaints
  • Division of Investor Awareness -1
  • Division of Investor Awareness -2
  • Division of Market Policy
  • Division of New Products
  • Division of Risk Management
  • Division of Products
  • Division of Inspection
Management Notes

Role of SEBI in the protection of investor interests

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An investor is one, may be an individual or a legal entity who invests capital in the venture or business but does not participate actively in the day to day management/ affairs of the business.

Following are the powers of SEBI to take punitive or preventive measures:

a) Power to issue directions under Sec. 11B and Sec. 11(4)

b) Power u/s 12(3) under Chapter V for suspension or cancellation of certificate of registration of brokers or intermediaries.

c) Power to levy monetary penalties under Chapter VIA of SEBI Act.

d) Powers are also described for Inquiry/ Enquiry/ Investigation, for violations like Insider Trading, Takeover Violations, etc. e) Power to Prosecute u/s 24(1) of SEBI Act.

SEBI has given out various methods and measures to ensure the investor protection from time to time. It has published various directives, driven many investor awareness programmes, set up investor protection Fund (IPF) to compensate the investors. We will look into the investor protection measures by SEBI in detail:

  • To begin with, SEBI constructs the limit of financial backers through instruction and attention to empower a financial backer to take educated choices. SEBI tries to guarantee that the financial backer gets the hang of contributing. In simpler words, SEBI ensures that the investor gets and utilizes data needed for contributing and assesses different speculation alternatives to suit his particular objectives.
  • SEBI has been putting together financial backer schooling and mindfulness workshops through financial backer affiliations and market members, and has been urging market members to sort out comparable projects.
  • It helps the investor find out his privileges and commitments in a specific venture, bargains through enlisted mediators, plays it safe, looks for help if there should be an occurrence of any complaint, and so on.

SEBI that it has adopted a major transition from Investor Protection to Investor Empowerment as past experiences hinted that this transition along with imparting proper education at both micro and macro levels will serve the purpose of SEBI and Investors both. And what SEBI does is answering the queries by E-mails, personal visits to head offices, and apart from it, the investors FAQs are also displayed on its website, and all this points out that, “An educated investor is a protected investor”. The task of this awareness generation is on IAD of SEBI, and based on SEBI Act in July 23, 2007, a fund entitled “Investor Protection and Education Fund” was established with initial corpus of Rs. 10 Cr from SEBI General Fund for educating investors and for executing such other related activities. It has even embarked on a mass media campaign aiming at dissemination of relevant messages to public about the harmfulness of investing in an unregistered scheme like CIS, Ponzi Schemes, etc. by offering messages like ‘not to rely on schemes offering unrealistic returns’, and such kind of messages are sent through a campaign consisting of many languages and in consonance and partnership with various institutions like ICAI, ICSI, AMFI, etc. SEBI initiated financial education programs utilizing Resource Persons, and have till now addressed people from different backgrounds like School Children, young investors, executives, home makers, retired people and SHGs. SEBI in a summarized manner has taken the following policy initiatives for investors protection:

a) Introducing system driven disclosures.

b) Strengthening continuous disclosure requirements for listed companies.

c) Providing an exit opportunity to investors in case of change of objects by issuers.

d) Monitoring of compliances by listed companies.

e) Cyber Security and Cyber Resilience framework for stock exchanges.

f) Filing of monthly reports by Clearing Corporations with SEBI.

g) Aadhar base e-KYC.

h) Surveillance of Stock Exchanges and various financial market and other intermediaries

Management Notes

Fixed Deposits in Companies

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Company Fixed Deposit (corporate FD) is a term deposit which is held over fixed period at fixed rates of interest. Company Fixed Deposits are offered by Financial and Non-Banking financial companies (NBFCs). The maturities of various company fixed deposits can range from a few months to a few years.

Factors before choosing Corporate FD schemes to invest in.

  • Company Background: Assess a company’s business viability by referring to its Financial Statements, Management Discussion and Analysis (MD & A).
  • Credit Rating: Opt for higher-rated corporate FDs based on its credit rating which indicates the underlying risk of the company.
  • Repayment History: Companies repayment history helps to determine company’s credit score, credibility and stability.

Reasons to invest:

Short-Term Investments

One of the major advantages of investing in corporate FDs is short-term investments. Bank FDs can be anywhere between a few months to a few years, but corporate FDs cannot exceed more than five years of timeframe, and this makes it a viable option when investors want high returns in a short duration of time.

Interest rates

Corporate FDs are the best in interest rates compared to banks. Considering a debt instrument where the investor needs higher returns, Corporate FDs can find the best fit. These are not influenced by the market performance and the fluctuations in the interest rate and provide much better returns than banks and other financial institutions.

Likewise to the banks, Corporate FDs also take care of the senior citizens. Here, senior citizens can find stability and attractive periodic money that can make life easier. Besides, the interest rates for senior citizens are higher than the banking schemes, which makes it a much more viable option when choosing to invest in FDs.

Ratings and Comparisons

Several corporates offer FDs, but which is the right company to invest the money as a Fixed Deposit? This is a common problem, and to solve this, investors can check the ratings of corporates given by CARE (Credit Analysis and Research Limited), CRISIL(Credit Rating Information Services of India Limited), or ICRA (Investment Information and Credit Rating Agency of India Limited) and then make a wise decision. These ratings are given to corporate after examining the company records, repayments, and interest rates which help potential investors by giving them a clear picture.

Company ratings are in the format AAA, AA, BBB, and more. AAA is the highest rating which signifies an investor can find a potential money hive after investing in such a company. This also gives a clear comparison with other companies, and investors can stop investing in a AA or BBB rating.

Solid Comparison

Several corporates offer Fixed Deposits but not all the corporates offer the same interest rate, they vary, and sometimes the marginal difference is too high. It is better to compare the corporates first before investing and check if they have better CARE, CRISIL, and ICRA ratings. AAA rating is considered to be the best.

Nominee

Nominee can be chosen by the investors when investing in corporate FDs, and this gives a greater advantage for investors. If the investor is holding a huge amount in the corporate Fixed Deposit and there is a sudden unfortunate demise of the investor, the nominee can take charge and possess all the money.

There is a higher return with the Corporate Fixed deposits compared to bank FDs, but there are a few notes that the investors should make before investing in Corporate FDs,

Research

One of the things that most investors do is only follow the rating system. Investors should check the company’s track record with profit and loss-making history. If the loss is a one-time or exceptional case and the track record is much positive. It can stand as a great investment opportunity for corporate FDs. Besides, it is a good practice to know the company’s plans and analyze if it will cause a positive or negative impact overall.

Premature Withdrawals

Most banks penalize the FD investors for premature withdrawals. This is usually around three months after investing. The situation is the same with Corporate FDs, and there is a penalty for premature withdrawal. It is best to know the penalty before investing.

Management Notes

Gold ETF, RBI Bonds

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Gold ETF

A Gold ETF is an exchange-traded fund (ETF) that aims to track the domestic physical gold price. They are passive investment instruments that are based on gold prices and invest in gold bullion.

In short, Gold ETFs are units representing physical gold which may be in paper or dematerialised form. One Gold ETF unit is equal to 1 gram of gold and is backed by physical gold of very high purity. Gold ETFs combine the flexibility of stock investment and the simplicity of gold investments.

Gold ETFs are listed and traded on the National Stock Exchange of India (NSE) and Bombay Stock Exchange Ltd. (BSE) like a stock of any company. Gold ETFs trade on the cash segment of BSE & NSE, like any other company stock, and can be bought and sold continuously at market prices.

Buying Gold ETFs means you are purchasing gold in an electronic form. You can buy and sell gold ETFs just as you would trade in stocks. When you actually redeem Gold ETF, you don’t get physical gold, but receive the cash equivalent. Trading of gold ETFs takes place through a dematerialised account (Demat) and a broker, which makes it an extremely convenient way of electronically investing in gold.

Because of its direct gold pricing, there is a complete transparency on the holdings of a Gold ETF. Further due to its unique structure and creation mechanism, the ETFs have much lower expenses as compared to physical gold investments.

Purity & Price:

Gold ETFs are represented by 99.5% pure physical gold bars. Gold ETF prices are listed on the website of BSE/NSE and can be bought or sold anytime through a stock broker. Unlike gold jewellery, gold ETF can be bought and sold at the same price Pan-India.

Where to buy:

Gold ETFs can be bought on BSE/NSE through the broker using a demat account and trading account. A brokerage fee and minor fund management charges are applicable when buying or selling gold ETFs

Source: https://www.amfiindia.com/investor-corner/knowledge-center/gold-etf.html

RBI Bonds

The Government of India launched the Floating Rate Savings Bonds, 2020 (Taxable) scheme on July 01, 2020 to enable Resident Indians/HUF to invest in a taxable bond, without any monetary ceiling.

Eligibility for Investment:

The Bonds may be held by:

(i) A person resident in India,

(a) in her or his individual capacity, or

(b) in individual capacity on joint basis, or

(c) in individual capacity on any one or survivor basis, or

(d) on behalf of a minor as father/mother/legal guardian

(ii) a Hindu Undivided Family

Form of the Bonds:

Electronic form held in the Bond Ledger Account.

Period:

The Bonds shall be repayable on the expiration of 7 (Seven) years from the date of issue. Premature redemption shall be allowed for specified categories of senior citizens.

Individuals

  • Duly filled in application form (Complete application forms with all pages in full,duly filled in from the investors)
  • Self attested PAN card copy of the investor
  • Self attested Address copy of the investor
  • Cancelled cheque leaf of the bank which was mentioned in application for interest and maturity payments
  • No correction / alteration allowed in the application and the corrections if any to be duly authenticated by the investor

HUF

  • Duly filled in application form (Complete application forms with all pages in full,duly filled in by the Karta with stamp and signature)
  • Self attested PAN card copy of the HUF
  • Self attested Address copy of the HUF
  • Cancelled cheque leaf of the bank which was mentioned in application for interest and maturity payments
  • No correction / alteration allowed in the application and the corrections if any to be duly authenticated by the Karta
  • List of coparceners in the Hindu Undivided Family along with their signatures attested by Karta

Minors

  • Duly filled in application form (Complete application forms with all pages in full,duly filled in from the Guardian)
  • Self attested PAN card copy of the minor / Guardian
  • Self attested Address copy of the minor / Guardian
  • Birth Certificate of the minor attested by the Guardian
  • Cancelled cheque leaf of the bank which was mentioned in application for interest and maturity payments
  • No correction / alteration allowed in the application and the corrections if any to be duly authenticated by the investor.
  • In case of POA, Original POA to be verified by the bank and certified as “Original Seen and Verified”.

Source: https://www.hdfcsec.com/rbi-bond

Management Notes

Secondary Market Meaning, Features, Types, Role, Function, Structure, Players

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Secondary Market refers to the financial marketplace where existing securities, previously issued in the primary market, are bought and sold among investors. It provides a platform for individuals and institutions to trade stocks, bonds, and other financial instruments after their initial issuance. Unlike the primary market, which involves the issuance of new securities, the secondary market facilitates the resale and exchange of already-existing securities. Stock exchanges, such as the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) in India, are key components of the secondary market, providing the infrastructure for transparent and organized trading activities. The secondary market enhances liquidity, price discovery, and market efficiency.

Small investors have a much better chance of trading securities on the secondary market since they are excluded from IPOs. Anyone can purchase securities on the secondary market as long as they are willing to pay the asking price per share.

A broker typically purchases the securities on behalf of an investor in the secondary market. Unlike the primary market, where prices are set before an IPO takes place, prices on the secondary market fluctuate with demand. Investors will also have to pay a commission to the broker for carrying out the trade.

The volume of securities traded varies from day to day, as supply and demand for the security fluctuates. This also has a big effect on the security’s price.

Because the initial offering is complete, the issuing company is no longer a party to any sale between two investors, except in the case of a company stock buyback. For example, after Apple’s Dec. 12, 1980, IPO on the primary market, individual investors have been able to purchase Apple stock on the secondary market. Because Apple is no longer involved in the issue of its stock, investors will, essentially, deal with one another when they trade shares in the company.

Features of Secondary Market

  • Liquidity

The secondary market provides liquidity by enabling investors to easily buy and sell securities after they have been issued in the primary market. This continuous trading environment allows investors to convert their investments into cash quickly without waiting for maturity or redemption. Liquidity also encourages more participation, as investors are confident they can exit their positions when needed. The ability to trade readily at market prices boosts investor confidence, promotes a vibrant trading environment, and enhances the overall attractiveness of capital markets as an investment avenue.

  • Price Discovery

One of the key features of the secondary market is price discovery, where the true value of securities is determined through the forces of supply and demand. As investors trade securities, the market constantly adjusts prices to reflect available information, investor sentiment, and external factors such as economic or political developments. This dynamic price-setting mechanism helps align market values with underlying fundamentals, guiding both buyers and sellers. Transparent price discovery ensures fair transactions, improves market efficiency, and assists policymakers and businesses in making informed financial decisions.

  • Transparency and Regulation

The secondary market operates under strict regulatory frameworks that enforce transparency, fairness, and investor protection. Stock exchanges and over-the-counter (OTC) platforms require regular disclosures, audited reports, and compliance with listing requirements, reducing the chances of manipulation or fraud. Regulatory bodies like SEBI (Securities and Exchange Board of India) oversee market practices to maintain orderly trading and safeguard public interests. Transparency attracts domestic and international investors by ensuring that all participants have equal access to information, promoting confidence and reinforcing the reputation of the financial market.

  • Standardization of Contracts

In organized secondary markets like stock exchanges and derivative exchanges, trading occurs through standardized contracts. These standards cover aspects such as lot size, delivery dates, settlement procedures, and margin requirements, ensuring uniformity and predictability for all participants. Standardization simplifies the trading process, minimizes misunderstandings, and reduces legal risks. It also encourages market participation by providing a clear, rule-based framework for buyers and sellers. This feature is particularly important in derivative and bond markets, where contract uniformity boosts efficiency, reduces counterparty risk, and strengthens overall market integrity.

  • Risk Transfer and Hedging

The secondary market facilitates the transfer and management of risk by allowing investors to buy and sell securities, including derivatives, to hedge against price fluctuations, interest rate changes, or currency risks. Institutional investors, banks, and corporations use these markets to protect themselves from adverse financial movements, ensuring stability in their operations. By enabling risk-sharing among a wide range of participants, the secondary market strengthens financial resilience, supports long-term investment strategies, and improves the overall stability of the economic system.

  • Market Depth and Breadth

A well-developed secondary market is characterized by market depth (availability of sufficient buy and sell orders at various price levels) and breadth (diverse range of traded securities). These qualities ensure that large orders can be executed without causing major price swings, reducing volatility and enhancing market stability. Depth and breadth attract institutional investors, foreign investors, and large trading houses by offering opportunities to trade a wide array of instruments efficiently. Together, they improve market efficiency, enhance investor confidence, and contribute to better resource allocation across the economy.

  • Continuous Availability of Information

The secondary market ensures that investors have continuous access to up-to-date information about traded securities, including prices, trading volumes, corporate announcements, and market news. This information flow enables informed decision-making, reduces information asymmetry between market participants, and fosters a level playing field. Market participants can analyze trends, assess risks, and adjust their portfolios accordingly. Timely availability of market data also aids regulators in monitoring for unusual patterns, ensuring fair play, and maintaining the credibility of the overall financial system.

  • Facilitates Capital Formation

While the primary market raises fresh capital, the secondary market plays an indirect role in capital formation by enhancing the attractiveness of securities. Investors are more willing to purchase newly issued shares or bonds if they know they can resell them in the secondary market. This liquidity feature increases the demand for primary issues, enabling companies and governments to raise funds efficiently. By providing an active trading environment, the secondary market complements the primary market and supports the continuous flow of capital into productive investments across sectors.

Types of Secondary Market
  • Stock Exchanges

Stock exchanges are formal, regulated secondary markets where shares, bonds, debentures, and other securities are bought and sold. Examples include the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) in India. These platforms ensure transparency, liquidity, and standardized trading procedures, making it easier for investors to trade securities. Stock exchanges provide real-time price discovery, safeguard investor interests, and facilitate seamless transfer of ownership between buyers and sellers. Their role is crucial for the smooth functioning of capital markets and for maintaining investor confidence.

  • Over-the-Counter (OTC) Market

The OTC market is an informal secondary market where securities, especially those not listed on formal exchanges, are traded directly between parties. These transactions are usually carried out via dealers or brokers, often involving customized contracts or securities like unlisted shares, government securities, or corporate bonds. OTC markets offer flexibility, personalized pricing, and access to niche investments. However, they also carry higher counterparty risks and less regulatory oversight compared to stock exchanges, requiring careful due diligence by participants.

  • Bond Markets

Bond markets are specialized segments of the secondary market where debt instruments like government bonds, corporate bonds, and municipal bonds are traded after issuance. These markets help investors manage portfolio risks, adjust their bond holdings, or take advantage of interest rate movements. Bond markets provide essential liquidity, allowing institutions like banks, mutual funds, or insurance companies to optimize their fixed-income portfolios. Well-developed bond markets enhance capital mobility, lower borrowing costs, and strengthen a country’s overall financial stability.

  • Derivative Markets

Derivative markets deal with financial instruments like futures, options, swaps, and forwards, whose value is derived from underlying assets such as stocks, commodities, currencies, or indices. These markets allow investors to hedge risks, speculate on price movements, or enhance portfolio performance. Derivatives are typically traded on specialized exchanges or OTC platforms, offering standardized contracts, margin requirements, and settlement procedures. Derivative markets play a vital role in improving market efficiency, providing price signals, and managing systemic risks across the financial system.

  • Foreign Exchange (Forex) Markets

Forex markets are global secondary markets where currencies are traded against each other. This market is the world’s largest and most liquid financial market, with participants including banks, corporations, governments, hedge funds, and individual traders. Forex markets facilitate international trade, investment, and remittances by providing a mechanism for currency conversion and exchange rate determination. They operate 24/7, offering high liquidity and fast execution. Forex trading occurs both on regulated exchanges and OTC platforms, depending on the type of participants and instruments.

  • Commodity Markets

Commodity markets are secondary markets where raw materials like gold, silver, crude oil, agricultural products, and metals are traded. These markets operate through commodity exchanges or OTC platforms and offer both spot and derivative contracts. Commodity markets help producers, consumers, and investors hedge against price volatility, discover fair prices, and manage supply chain risks. They attract various participants, including traders, exporters, importers, and institutional investors. By enabling efficient resource allocation, commodity markets play a significant role in global trade and economic stability.

  • Money Markets

Money markets are short-term debt markets where instruments like treasury bills, certificates of deposit, commercial papers, and call money are traded. These markets help institutions manage short-term liquidity needs and enable investors to earn returns on surplus funds. Money markets offer low-risk, highly liquid investments suitable for banks, corporations, and mutual funds. Trading typically occurs OTC or through negotiated deals, ensuring flexibility and efficiency. A well-functioning money market supports monetary policy transmission, financial system stability, and short-term funding operations.

  • Debt Market (Corporate Debt Segment)

The corporate debt market is a secondary segment where corporate-issued bonds, debentures, and other debt securities are traded after initial issuance. These markets help investors adjust their exposure to corporate credit risk, interest rate movements, or market conditions. Corporate debt markets offer institutional investors portfolio diversification, stable income streams, and long-term capital gains. They also provide companies with secondary liquidity, making debt instruments more attractive to primary investors. Strong corporate debt markets contribute to deepening financial intermediation and reducing reliance on bank funding.

  • Government Securities Market

The government securities market, or G-Sec market, is where sovereign debt instruments like treasury bills, dated securities, and state development loans are traded. This secondary market enables banks, insurance companies, pension funds, and foreign investors to manage sovereign credit exposure, meet regulatory requirements, or adjust interest rate risk. G-Sec markets offer high liquidity, low credit risk, and reliable benchmark yields, making them central to monetary operations and public debt management. A robust G-Sec market strengthens fiscal discipline, enhances investor confidence, and supports financial system resilience.

Role of Secondary Market

  • Maintaining the Fair Price of Shares

The secondary market is a market of already issued securities after the initial public offering (IPO). Capital markets run on the basis of supply and demand of shares. Secondary markets maintain the fair price of shares depending on the balance of demand and supply. As no single agent can influence the share price, the secondary markets help keep the fair prices of securities intact.

  • Facilitating Capital Allocation

Secondary markets facilitate capital allocation by price signaling for the primary market. By signaling the prices of shares yet to be released in the secondary market, the secondary markets help in allocating shares.

  • Offering Liquidity and Marketability

Second-hand shares are of no use if they cannot be sold and bought for liquid cash whenever needed. The shareholders usually use the share markets as the place where there is enough liquidity and marketability of shares. That means that the secondary markets play the role of a third party in the exchange of shares.

Without a secondary market, the buyers and sellers would be left with a self-exchange in one-to-one mode that is not quite effective till now. Therefore, the secondary market is a facilitating body of liquidity and marketability for the shareholders.

  • Adjusting the Portfolios

Secondary markets allow investors to adapt to adjusting portfolios of securities. That is, the secondary markets allow investors to choose shares for buying as well as for selling to build a solid portfolio of shares that offers maximum returns. Investors and shareholders can change their investment portfolios in secondary markets that cannot be done anywhere else.

Functions of Stock Market

  • Capital Formation

Primary Market: The stock market facilitates the primary market, where companies raise capital by issuing new securities, such as stocks and bonds. This process allows businesses to fund expansion, research, and other capital-intensive activities.

  • Secondary Market Trading

Liquidity Provision: The secondary market provides a platform for investors to buy and sell existing securities, enhancing liquidity. Investors can easily convert their investments into cash, and this liquidity contributes to market efficiency.

  • Price Discovery

Market Valuation: The stock market plays a crucial role in determining the fair market value of securities through the continuous buying and selling of shares. This price discovery process reflects investor perceptions of a company’s performance and future prospects.

  • Facilitation of Investment

The stock market encourages savings and investment by providing individuals and institutions with opportunities to invest in a diversified portfolio of securities. This helps channel funds from savers to productive enterprises.

  • Ownership Transfer

Investors can easily buy and sell securities, allowing for the transfer of ownership in a transparent and regulated manner. This facilitates the transfer of funds between investors and supports portfolio diversification.

  • Borrowing and Lending

The stock market serves as a platform for companies to raise funds by issuing bonds. Investors who purchase these bonds essentially lend money to the issuing companies, creating an additional avenue for corporate financing.

  • Market Indicators

The performance of stock indices, such as the Nifty 50 and the Sensex in India, serves as indicators of the overall health and sentiment of the financial markets and the economy at large.

  • Corporate Governance

Stock markets impose certain listing requirements on companies, promoting transparency and adherence to corporate governance standards. Companies with publicly traded shares are often subject to higher scrutiny, enhancing investor confidence.

  • Dividend Distribution

Companies listed on stock exchanges can distribute dividends to their shareholders, providing a return on investment. Dividends are a key factor influencing investment decisions and shareholder wealth.

  • Risk Mitigation

Investors can manage risk through diversification, buying and selling securities, and utilizing various financial instruments available in the stock market, such as options and futures.

  • Economic Indicator

The stock market’s performance is often considered a barometer of economic health. Bullish markets are associated with economic optimism, while bearish markets may reflect concerns about economic conditions.

  • Market Efficiency

The stock market allocates resources efficiently by directing capital to companies with the most promising growth prospects. Efficient market mechanisms contribute to the optimal allocation of resources within the economy.

  • Facilitation of Mergers and Acquisitions

The stock market plays a role in corporate restructuring by facilitating mergers and acquisitions. Companies can use their shares for acquisitions, enabling strategic growth and consolidation.

Structure of Stock Market

The stock market in India has a well-defined structure, comprising various entities and mechanisms that facilitate the buying and selling of securities. The structure encompasses both primary and secondary markets, each serving distinct functions in the capital market ecosystem.

1. Primary Market

The primary market is where new securities are issued and initially offered to the public. It consists of the following elements:

    • Issuer: The company or entity that issues new securities to raise capital. This can include initial public offerings (IPOs) and additional offerings.
    • Underwriter: Investment banks or financial institutions that facilitate the issuance by committing to purchase the entire issue and then selling it to the public.
    • Registrar and Transfer Agent (RTA): Entities responsible for maintaining records of shareholders and processing share transfers.

2. Secondary Market

The secondary market is where existing securities are traded among investors. The primary components include:

    • Stock Exchanges: Platforms where buyers and sellers come together to trade securities. In India, the two primary stock exchanges are the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). They regulate and oversee the trading activities and ensure market integrity.
    • Brokers and Sub-Brokers: Intermediaries authorized to facilitate securities transactions on behalf of investors. They act as a link between investors and the stock exchanges.
    • Depositories: Entities that hold and maintain securities in electronic form. In India, the two central depositories are the National Securities Depository Limited (NSDL) and the Central Depository Services Limited (CDSL). They facilitate the electronic transfer of securities.
    • Clearing Corporation: Entities that handle the clearing and settlement of trades, ensuring the smooth and secure transfer of securities and funds between buyers and sellers. In India, the National Securities Clearing Corporation Limited (NSCCL) and the Clearing Corporation of India Limited (CCIL) play crucial roles.
    • Custodians: Institutions responsible for safeguarding and holding securities on behalf of investors. They provide custodial services to institutional investors, foreign institutional investors (FIIs), and high-net-worth individuals.

3. Regulatory Authorities

Regulatory bodies oversee and regulate the functioning of the stock market to ensure fair practices, investor protection, and market integrity. In India, the Securities and Exchange Board of India (SEBI) is the primary regulatory authority governing the securities market.

4. Investors

Investors are individuals, institutions, or entities that participate in the stock market by buying and selling securities. They can include retail investors, institutional investors, foreign investors, and other market participants.

5. Market Intermediaries

Various intermediaries facilitate different functions in the stock market. These include investment advisors, merchant bankers, credit rating agencies, and financial institutions that contribute to the smooth operation of the market.

6. Indices

Stock market indices provide a benchmark for measuring the performance of the overall market or specific segments. In India, prominent indices include the Nifty 50 and the Sensex.

7. Market Surveillance and Compliance

Surveillance mechanisms and compliance functions ensure that the market operates within regulatory frameworks. This includes monitoring for market abuse, insider trading, and other malpractices.

8. Technology Infrastructure

The stock market relies on advanced technological infrastructure to facilitate trading, clearing, and settlement processes. Electronic trading platforms, data dissemination systems, and secure networks contribute to the efficiency of market operations.

Players in Stock Market

The stock market involves various players, each playing a distinct role in the buying, selling, and overall functioning of the financial markets. These participants contribute to the liquidity, transparency, and efficiency of the stock market.

1. Investors

    • Retail Investors: Individual investors who buy and sell securities for personal investment. They include small-scale investors, often trading through brokerage accounts.
    • Institutional Investors: Large entities like mutual funds, pension funds, insurance companies, and hedge funds that invest on behalf of a group of individuals or their members.

2. Stock Exchanges

    • Bombay Stock Exchange (BSE): One of the major stock exchanges in India.
    • National Stock Exchange (NSE): Another significant stock exchange, known for electronic trading and providing a platform for various financial instruments.

3. Brokers and Sub-Brokers

    • Brokers: Facilitate securities transactions between buyers and sellers. They may be full-service brokers providing a range of services or discount brokers offering lower-cost trading.
    • Sub-Brokers: Individuals or entities affiliated with brokers, authorized to facilitate trades on their behalf.

4. Market Intermediaries

    • Merchant Bankers: Facilitate the issuance of new securities in the primary market and provide financial advisory services.
    • Underwriters: Guarantee the sale of newly issued securities, ensuring that the issuing company receives the intended capital.

5. Depositories

    • National Securities Depository Limited (NSDL): A central securities depository in India, holding securities in electronic form.
    • Central Depository Services Limited (CDSL): Another central depository facilitating the electronic holding and transfer of securities.

6. Clearing Corporations

    • National Securities Clearing Corporation Limited (NSCCL): Handles clearing and settlement for equity and derivatives segments.
    • Clearing Corporation of India Limited (CCIL): Manages clearing and settlement for fixed income and money market instruments.

7. Regulatory Authorities

    • Securities and Exchange Board of India (SEBI): The regulatory body overseeing the securities market in India, responsible for investor protection and market integrity.

8. Corporate Entities

    • Listed Companies: Companies whose shares are listed on stock exchanges, allowing them to raise capital and provide ownership to shareholders.
    • Unlisted Companies: Companies that are not listed on stock exchanges.

9. Research Analysts and Advisory Firms

Professionals and firms providing research, analysis, and investment advice to investors. They play a role in guiding investment decisions.

10. Credit Rating Agencies

Entities that assess the creditworthiness of issuers and their securities, providing credit ratings to assist investors in evaluating risk.

11. Custodians

Financial institutions responsible for the safekeeping of securities on behalf of investors, particularly institutional investors.

12. Government

The government, through various agencies, can influence the stock market through fiscal and monetary policies, regulations, and initiatives.

13. Media

Financial news outlets and media play a role in disseminating information about market trends, company performance, and economic developments, influencing investor sentiment.

14. Arbitrageurs and Speculators

Individuals or entities engaging in arbitrage (exploiting price differences) and speculation (betting on future price movements) to profit from market inefficiencies.

15. Technology Providers

Companies providing technology infrastructure, trading platforms, and data services essential for the operation of electronic trading in the modern stock market.

Management Notes

Objectives of NSE, BSE & OTCEI

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Objectives of NSE

National Stock Exchange of India (NSEI) commenced operations in Whole- sale Debt Market (WDM) in June 1994 and trading in equities has been started in the Capital Market Segment (CM) in November 1994.

  • To establish nationwide trading facility for equities and debt instruments.
  • To provide a fair, transparent and efficient securities market to investors using electronic trading system.
  • To ensure equal access to investors all over the country through an appropriate communication network.
  • To improve the standard of securities market to international level.

Objectives of BSE

The full form of BSE is the Bombay Stock Exchange. The BSE is the oldest stock exchange of Asia which was established in the year 1875 as Native Shares and Stock Broker’s Association and is the first exchange in India that was recognized as the exchange in the year 1957 under the Securities Contract (Regulation) Act by the government. Since then, it is playing a pivotal role in the development of the capital market of the country.

  • To provide a trading platform for equities of small and medium enterprises.
  • To provide an efficient and transparent market for trading in equity, debt instruments, derivatives, and mutual funds.
  • To ensure active trading and safeguard market integrity through an electronically-driven exchange.
  • To provide other services to capital market participants, like risk management, clearing, settlement, market data, and education.
  • To conform to international standards.

Objectives of OTCEI

The establishment of the Over the Counter Exchange of India (OTCEI) marked the down of a new era in the history of a stock exchanges in India. It is regarded a blessing for the small, both existing and new, companies and for investors, particularly small investors. The OTCEI which was incorporated in 1990 become fully operational in 1992.

Over The Counter Exchange of India allows nationwide listing and trading in securities, widely disbursed trading across centres provides for greater liquidity and less risk of intermediary charges, there is no arbitrage. The main feature is screen based scrip less trading, settlement is faster and no physical delivery of scrips is involved. The approach is highly professional.

  • National Network:

Unlike other Stock Exchanges, the Over the Counter Exchange will have a nationwide reach enability widely dispersed trading across the cities, resulting in greater liquidity. Companies, thus, have the unique benefit of nationwide listing and trading of their script by listing at one exchange, Over the Counter Exchange.

  • Ringless Trading:

Over the Counter Exchange has eliminated the traditional trading ring with a view to have greater accessibility to the investors. Trading will instead take place through a network of computers (screen based) of Over the Counter dealers at located several places within the same city and even across cities. These computers allow dealers to quote, query and transact through a central Over the Counter computer using telecommunication links. Investors can walk into any of the counters of members and dealers and see the quote display on the screen, decide to deal and conclude the transaction.

  • Computerized Totally:

All the activities of the Over the Counter trading process will be computerized, making for more transparent, quick and disciplined mark. The trading mechanism brings on these features of the system.

  • Two Ways of Making Public Offer:

Another unique of Over the Counter Exchange of India is its two ways of making public offer. Under ‘direct offer’ a company can offer its shares directly to the public after getting it sponsored by sponsored but under indirect offer’, the company may give its shares first to the sponsor who along with the company can at a later and convenient time make a public offer.

  • Exclusive List of Companies:

The Over the Counter Exchange will not list and trade in companies listed on any other stock exchange. It will therefore list an entirely new set of companies sponsored by members of the Over-the-Counter Exchange.

  • Faster Transfers and Trading Without Shares:

Over the Counter trading also provides for transfer of shares by Registrars, up to a certain percentage per folio. This results in faster transfers. The concept of immediate settlement makes it better for the investors. Investors will trade, not with share certificates, but with a different tradable documents called Counter Receipt (CR). However, an investor can always exercise his right of having a share certificate for Counter Receipt surrendering the Counter Receipt and again exchanging the share certificate for Counter Receipt when he wants to trade. There will be a custodian who will provide this facility along with a settler who will do the signature verification and Counter Receipt validation.

  • Investor Registration:

Yet another feature of Over the Counter Exchange of India is investor registration, introduced for the first time in India. The investor registration is required to be done only once and is valid for trading on any Over the Counter in the country in any scrip. The purpose of the investor registration is to facilitate computerized trading. It also provides greater safety of operations to the investors.

Management Notes

Intermediaries (Players) in the New Issue Market

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The new issue market / activity was regulated by the Controller of Capital Issues (CCI) under the provisions of the Capital Issues (Control) Act, 1947 and the exemption orders and rules made under it. With the repeal of the Act and the consequent abolition of the office of the CCI in 1992, the protection of the interest of the investors in securities market and promotion of the development and regulation of the market/ activity became the responsibility of the SEBI.

Merchant Bankers (Managers to the Issue):

SEBI regulations 1992 prescribes that all public issues should be managed by at least one merchant banker functioning as Lead manager or Managers to the Issue.

“Merchant banker means any person/institution who is engaged in the business of issue management either by making arrangements regarding selling, buying or subscribing to securities as manager, consultant, advisor or rendering corporate advisory services in relation to such issue management.” [Sec 2(cb) SEBI (Merchant Bankers) (Third Amendment) Regulations, 2006]

Depending on the size of the issue there can be more than one manager to the issue. If the size exceeds Rs. 400 crores there can be five or more managers as agreed by SEBI. These Managers to the issue assist the promoters in designing the capital structure, drafting the prospectus and application forms, listing of shares, appointment of registrars and other operators in the new issue, arrangement of long term loans- marketing of public issues etc. The lead manager prepares Draft Red Herring Prospectus (RHP) and is responsible for any irregularities in the same. The company should enter into a memorandum of understanding with the managers to the issue in the form prescribed by SEBI.

The lead merchant bankers appointed by the Issuer Company are referred to as the Book Running Lead Managers (BRLM) or Book Runners (If the issue is through book building process).

Underwriters

Underwriters: Another important intermediary in the new issue/ primary market is the underwriters to issue of capital who agree to take up securities which are not fully subscribed.

They make a commitment to get the issue subscribed either by others or by themselves. Though underwriting is not mandatory after April 1995, its organization is an important element of primary market. Underwriters are appointed by the issuing companies in consultation with the lead managers / merchant bankers to the issues.

Methods of Underwriting

An underwriting agreement may take any of the following forms:

  • Standing behind the Issue:

Under this method the underwriter guarantees the sale of a specified number of shares within a specified period. If the public do not subscribe to the specified amount of issue, the underwriter will buy the balance. It is also called full underwriting.

  • Outright Purchase:

In this method the underwriters purchases the entire issues at an agreed price and sell them to investors.

  • Consortium Method:

In mega issues several underwriters join together to underwrite. They form a consortium/syndicate for this purpose. It is also called syndicate underwriting.

  • Partial Underwriting:

The underwriter undertakes the guarantee for only a part of the issue offered to the public and his liability is limited to the extent of unsubscribed portion of the issue underwritten by him under this method.

  • Joint Underwriting:

The issuing company may enter into underwriting agreement with more than one underwriter in case of large issues. Each under-writer undertakes the guarantee for the issue of a certain portion of the whole issue offered to the public and shares the risk.

  • Firm Underwriting:

Under this method, the underwriter undertakes to buy or subscribe a certain number of shares irrespective of the subscription from the public. Underwriter will be liable for shares underwritten as well as that part of issue unsubscribed by the public.

  • Sub-Underwriting:

Under this method, the underwriter enters into agreement with some other underwriters to undertake guarantee for the issue of whole or part of the issue under-written by him.

Underwriting has the following advantages:

(i) Issuing company is assured of procuring the required funds from issue through underwriting.

(ii) Under writers supply expert advice and valuable information with regard to capital market conditions, general response of the investors etc. to the issuing company.

(iii) Underwriting helps promoters to retain control over the management of the company, because they distribute the issue over a large number of investors scattered in different part of the country.

(iv) Prestige of the underwriting agencies increases the goodwill of the issuing company.

(v) Prospective investors are also benefited through the service of underwriters as they provide essential information about the issuing companies and encourage them to save money is corporate securities.

Underwriters charge a commission for their service which is known as underwriting commission. The underwriters must be registered with SEBI. There are three SEBI registered underwriters now. E.g., Citicorp Capital Markets Ltd., State Bank of India etc.

Brokers to the Issue

Brokers are persons mainly concerned with the procurement of subscription to the issue from the prospective investors. The appointment of brokers is not compulsory and the companies are free to appoint any number of brokers. The managers to the issue and the official brokers organize the preliminary distribution of securities and procure direct subscription from as large or as wide a circle of investors as possible. A copy of the consent letter from all the brokers to the issue, should be filed with the prospectus to the ROC. The brokerage applicable to all types of public issue of industrial securities is fixed at 1.5%, whether the issue is underwritten or not. The listed companies are allowed to pay a brokerage on private placement of capital at a maximum rate of 0.5%. Brokerage is not allowed in respect of promoters’ quota including the amounts taken up by the directors, their friends and employees, and in respect of the rights issues taken by or renounced by the existing shareholders. Brokerage is not payable when the applications are made by the institutions/ bankers against their underwriting commitments or on the amounts devolving on them as underwriters consequent to the under subscription of the issues.

Registrars to the Issue (Registrar and Share Transfer (R&T) Agents):

R&T agent plays a significant role in a public issue along with the lead managers. Registrars are persons appointed in consultation with lead managers to assist the issue management functions. Their work relates to pre-issue management, management during the currency of issue, pre- allotment Work, allotment work and post allotment work.

It is their duty to collect the application forms from bankers to the issue, process them for allotment and issue certificate of allotment.

Major functions of registrars can be listed as follows:

(i) Design and draft the format of application form for the merchant banker or lead manager.

(ii) Collect application forms from banks.

(iii) Scrutinize application forms.

(iv) Finalize the allotment as per the basis approved by the stock exchange.

(v) Ensures that the corporate action for crediting of shares to the demat accounts of the applicants is done

(vi) Print refund orders and letters of allotment.

(vii) Submit all statements to the company for their final approval.

(viii) Help the company in getting the shares listed.

Bankers to an Issue

The bankers to an issue are engaged in activities such as acceptance of applications along with application money from the investor in respect of capital and refund of application money.

Registration: To carry on activity as a banker to issue, a person must obtain a certificate of registration from the SEBI. The applicant should be a scheduled bank. Every banker to an issue had to pay to the SEBI an annual free for Rs. 5 lakh and renewal fee or Rs. 2.5 lakh every three years from the fourth year from the date of initial registration. Non-payment of the prescribed fee may lead to the suspension of the registration certificate.

Syndicate Members:

The Book Running Lead Managers to the issue appoint the Syndicate Members, who enter the bids of investors in the book building system. Syndicate Members are commercial or investment banks registered with SEBI who also carry on the activity of underwriting in IPO.

They work as intermediaries for Issuer Company and the buyers of the IPO stocks. Investors submit their bids for IPO shares through Syndicate Members appointed by the Issuer Company. They are also known as ‘the Members of the Syndicate’. The Members of the Syndicate circulate copies of the Red Herring Prospectus along with the bid cum application form to potential investors. After receiving the bid for IPO Shares from an investor, Syndicate Member enters bidding detail into the electronic bidding system and generates a Transaction Registration Slip (TRS) for each price and demand option and gives the same to the bidder.

Management Notes

Benefits and Limitations of Stock Exchange

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The National Stock Exchange of India Limited (NSE) is the leading stock exchange of India, located in Mumbai. The NSE was established in 1992 as the first demutualized electronic exchange in the country. NSE was the first exchange in the country to provide a modern, fully automated screen-based electronic trading system which offered easy trading facility to the investors spread across the length and breadth of the country. Vikram Limaye is Managing Director & Chief Executive Officer of NSE.

National Stock Exchange has a total market capitalization of more than US$2.27 trillion, making it the world’s 11th-largest stock exchange as of April 2018. NSE’s flagship index, the NIFTY 50, the 50 stock index is used extensively by investors in India and around the world as a barometer of the Indian capital markets. Nifty 50 index was launched in 1996 by the NSE. However, Vaidyanathan (2016) estimates that only about 4% of the Indian economy / GDP is actually derived from the stock exchanges in India.

Benefits

To the Investors

  • Availability of regular information on prices of securities traded at the stock exchanges helps them in deciding on the timing of their purchase and sale.
  • The investors enjoy the ready availability of facility and convenience of buying and selling the securities at will and at an opportune time.
  • Because of the assured safety in dealings at the stock exchange the investors are free from any anxiety about the delivery and payment problems.
  • It becomes easier for them to raise loans from banks against their holdings in securities traded at the stock exchange because banks prefer them as collateral on account of their liquidity and convenient valuation.

To the Companies

  • The market for their securities is enlarged as the investors all over the world become aware of such securities and have an opportunity to invest.
  • The companies whose securities have been listed on a stock exchange enjoy a better goodwill and credit-standing than other companies because they are supposed to be financially sound.
  • As a result of enhanced goodwill and higher demand, the value of their securities increases and their bargaining power in collective ventures, mergers, etc. is enhanced.
  • The companies have the convenience to decide upon the size, price and timing of the issue.

To the Society

  • The facility for convenient purchase and sale of securities at the stock exchange provides support to new issue market. This helps in promotion and expansion of industrial activity, which in turn contributes, to increase in the rate of industrial growth.
  • The availability of lucrative avenues of investment and the liquidity thereof induces people to save and invest in long-term securities. This leads to increased capital formation in the country.
  • The Stock exchanges facilitate realisation of financial resources to more profitable and growing industrial units where investors can easily increase their investment substantially.
  • The volume of activity at the stock exchanges and the movement of share prices reflect the changing economic health.
  • Since government securities are also traded at the stock exchanges, the government borrowing is highly facilitated. The bonds issued by governments, electricity boards, municipal corporations and public sector undertakings (PSUs) are found to be on offer quite frequently and are generally successful.

Limitations of Stock Exchanges

Like any other institution, the stock exchanges too have their limitations. One of the common evils associated with stock exchange operations is the excessive speculation. Speculation implies buying or selling securities to take advantage of price differential at different times. The speculators generally do not take or give delivery and pay or receive full payment. They settle their transactions just by paying the difference in prices.

Normally, speculation is considered a healthy practice and is necessary for successful operation of stock exchange activity. But, when it becomes excessive, it leads to wide fluctuations in prices and various malpractices by the vested interests. In the process, genuine investors suffer and are driven out of the market.

Another shortcoming of stock exchange operations is that security prices may fluctuate due to unpredictable political, social and economic factors as well as on account of rumor’s spread by interested parties. This makes it difficult to assess the movement of prices in future and build appropriate strategies for investment in securities. However, these days good amount of vigilance is exercised by stock exchange authorities and SEBI to control activities at the stock exchange and ensure their healthy functioning.

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