Stock exchange is a market where stocks, shares and other securities are brought and sold. It is a market where the owners of securities can dispose them of as and when they desire. Stock exchange or stock market has both primary and secondary market segments.

Marketing of securities on the stock market can be done only through members of the Stock exchange. The stock exchange members act in one or more capacities as: (a) commission broker (b) floor broker (c) Tarvaniwala (d) jobber or dealer (e) badliwala or financier and (f) arbitrageur.

III. Role and functions of stock exchanges

A well organized stock exchange performs a number of useful functions in an economy. Important among them are given as follows:

i) An organized stock exchange operating under the well defined rule and regulations minimizes the dangers of speculative dealings and price manipulations.

ii) Stock exchange provides a ready market for trading in securities and in this way capital is made more mobile.

iii) Stock exchange helps in determining the prices of securities.

iv) Stock exchange enables the business firms to raise large volumes of funds from the market.

v) Stock exchange increases the credit worthiness of the business enterprises. A company whose shares are listed in a stock exchange acts as a barometer of business conditions in the country.

vi) A competitive and efficient stock exchange acts as a barometer of business conditions in the country.

vii) Stock exchange helps the investors in many ways: (a) It enables the investors to utilize their surplus funds gainfully. (b) It helps them to shift from one business to another. (c) Stock market quotations enable the investors to know the worth of securities. (e) Stock exchange lessens the risks of the investors by providing a continuous market, high negotiability or securities, correct evaluation, facility to liquidate investment.

IV. Primary markets

Primary market is the segment in which new issues

are made whereas secondary market is the segment in which outstanding issues are traded. It is for this reason that the Primary Market is also called New Issues Market and the Secondary Market is also called as Stock Market. In the primary market, new issues may be made in three ways namely, public issue, rights issue and private placement. Public issues involves sale of securities to members of public. Rights issue involves sale of securities to the existing shareholders/debenture holders. Private placement involves selling securities privately to a selected group of investors. In the primary market, equity shares, fully convertible debentures (FCD), partially convertible debentures (PCD) and non-convertible debentures (NCD) are the securities commonly issued by non-government public limited companies. Government companies issue equity shares and bonds. Primary market has become very active in India after the abolition of Controller of Capital Issue.

In the primary market, issues are made either at par or at premium. Pricing the new issues is regulated under guidelines on capital issues or what are also known as guidelines for disclosure and investors protection issued by the Securities and Exchange Board of India (SEBI).

All issues by a new company has to be made at par and for existing companies the issue price should be justified, as per Malegam Committee recommendations by

The Earnings per Share (EPS) for the last three years and comparison of pre-issue Price to Earnings ratio to the Price to Earnings ratio of the industry.

Latest Net Asset Value.

Minimum return on increased net worth to maintain pre-issue EPS. A company may also raise finance from the international markets.

Principal steps of a public issue

The process of a public issue starts with the preparation of a draft prospectus which gives out details of the company, promoters background, management, terms of the issue, project details, modes of financing, past financial performance, projected profitability and others. Additionally a venture capital firm has to file the details of the terms subject to which funds are to be raised in the proposed issue in a document called the placement memorandum.

a) Appointment of Underwriters: The underwriters are appointed who commit to shoulder the liability and subscribe to the shortfall in case the issue is under subscribed. For this commitment they are entitled to a maximum commission of 2.5% on the amount underwritten.

b) Appointment of Bankers: Bankers along with their branch network act as the collecting agencies and process the funds procured during the public issue. The Banks provide temporary loans for the period between the issue date and the date the issue proceeds becomes available after allotment, which is referred to as a bridge loan.

c) Appointment of Registrars: Registrars process the application forms, tabulate the amounts collected during the issue and initiate the allotment procedures.

d) Appointment of the Brokers to the Issue: Recognised members of the stock exchanges are appointed as brokers to the issue for marketing the issue. They are eligible for a maximum brokerage of 1.5%.

e) Filing of prospectus with the Registrar of companies: The draft prospectus along with the copies of the agreements entered into with the lead manager, underwriters, bankers, registrars and brokers to the issue is filed with the registrar of companies of the state where the registered office of the company is located.

f) Printing and Dispatch of Application forms: The prospectus and application forms are printed and dispatched to all the merchant bankers, underwriters, brokers to the issue.

The rights issue involves selling of securities to the existing shareholders in proportion to their current holding. When a company issues additional equity capital, it has to be offered in the first instance to the existing shareholders on a pro-data basis. The shareholders may be a special resolution forfeits this right, partially or fully by a special resolution to enable the company to issue additional capital to the public or alternatively by passing a simple resolution and taking the permission of the central government. There is no restriction on pricing of rights issues.

A private placement results from the sale of securities by the company to one or few investors. The issues are normally the listed public limited companies or closely held public or private limited companies which cannot access the primary market. The securities are placed normally with the institutional investors, mutual funds or other financial institutions.

The secondary market is the segment in which outstanding issues are traded and thus provide liquidity. Investors, who seek both profitability and liquidity, need both primary and secondary markets. There is thus a direct and complementary interface between the primary and secondary markets. Secondary market exists both for short term securities and long term securities. It exists for debt, equity and a variety of hybrid securities. While the secondary market activities in money market securities are conducted over phone or through market makers, the trading is more organized for long term securities and conducted through stock exchanges. Buying and selling securities in secondary market is fairly simple. Investors have to open an account with a member of stock exchange and then place orders through the member.