Stock Exchange | Meaning and Definition | Various aspects

What is a Stock Exchange?

A market place where industrial and financial securities are purchased are called a Stock Exchange. Stock refers to a fraction of a company’s capital and the word exchange is the place where the securities are purchased or sold. But in actual practice, the term is used in a wider sense.

Modem Stock Exchanges provide facilities not only for trading in shares but also in other securities used by joint stock companies, corporations, Government and local bodies i.e. securities of both private and public sectors. The securities dealt with in a stock exchange are only second hand securities that are already issued.

Definition of Stock Exchange

The Securities Contracts (Regulation) Act, 1956, defines a stock exchange as

an association, organization or body of individuals whether incorporated or not, established for the purpose of assisting, regulating and controlling business in buying or dealing in securities.

The above definition make it clear that stock exchanges are the institutions organized for providing necessary facilities to carry on trading or dealings in securities.

Characteristics of Stock Exchange

The essential features of a stock exchange are:

1. Voluntary Association: The stock exchanges are voluntary associations registered by certain statutory laws.

2. Control of the Governing Body: The members of the exchange elect a governing body, which exercises proper and adequate control over its members.

3. Rules and Regulations: The members should obey the rules and regulations formulated by the stock exchange.

4. Listed Securities: Securities enlisted in the official list of the stock exchange can alone be transacted in the exchanges. Enlisting of securities is very essential to safeguard the interests of the investors from unscrupulous brokers and dealers in the stock exchanges.

How are Stock Exchanges organized in India?

There is certain amount of diversity in the organizational pattern of the stock exchanges in our country. Except Bombay and Ahmadabad Stock Exchanges, all other stock exchanges were organized only in the present century.

On the model of the London Stock Exchange, both the Bombay and Ahmadabad exchanges were organized as voluntary and non-profit making associations. Indore Stock Exchange was also organized on similar pattern. Other exchanges are in the form of limited companies registered under the Companies Act.

Whatever be the form of organization, only recognized stock exchanges can operate in India under the Securities Contracts (Regulation) Act 1956. The policy of the Government is to recognize only one stock exchange in one area.

Recognized Stock Exchanges in India

Twenty three stock exchanges have so far been recognized by the Central Government under the Act. They are:

1. Ahmedabad Stock Exchange Ltd.

2. Bangalore Stock Exchange Ltd.

3. Bhubaneshwar Stock Exchange Ltd.

4. Bombay Stock Exchange Ltd.

5. Cochin Stock Exchange Ltd.

6. Coimbatore Stock Exchange.

7. Inter connected Stock Exchange of India Ltd.

8. Jaipur Stock Exchange Ltd.

9. Madhya Pradesh Stock Exchange Ltd.

10. Madras Stock Exchange Ltd.

11. MCX Stock Exchange Ltd

12. National Stock Exchange of India Ltd.

13. OTC Exchange of India

14. Pune Stock Exchange Ltd.

15. The Calcutta Stock Exchange Ltd.

16. The Delhi Stock Exchange Ltd.

17. The Gauhati Stock Exchange Limited

18. The Ludhiana Stock Exchange Ltd.

19. U.P. Stock Exchange Ltd.

20. United Stock Exchange of India Limited (– USE)

21. Vadodara Stock Exchange Ltd.


Membership in the Stock Exchanges

Only members can enter into the floor of the stock exchange and transact business in listed securities. Only individuals can become members of stock exchange. Their number is also restricted with a view to avoid unhealthy trading by less experienced and financially weak speculators. Therefore, only persons with fair integrity, experience and financial backing are allowed to become members of the exchange.

If anyone wants to become a member, his name must be recommended by two existing members of at least five years standing.

The Governing Board will consider the application and it has the right to accept or reject the application. If the application is accepted, the applicant should deposit Rs. 20,000 in cash or in securities. He should also purchase a card. If the stock exchange is a registered company, the applicant after admission should buy at least one share of the stock exchange.

The applicant should also give an undertaking to the exchange that he would strictly follow the rules and regulations of the stock exchange and submit himself to the disciplinary jurisdiction of the stock exchange.

It should also be noted that membership in the Indian Stock Exchange is generally open to adults only. But the minimum age prescribed for a member in the Madras Stock Exchange is only 18 years. However, in Bombay Stock Exchange and in other exchanges the age limit is 21 years. Bankrupts and lunatics are not eligible for membership.

The Government has now prescribed some minimum experience for admission as a member. As per the Securities Contracts (Regulation) Rules, any person who seeks admission must have acquired a minimum experience of two years as an authorized clerk or a partner of a remiser or an apprentice to a member of a stock exchange.

Classification of Stock Exchange Members in India

In India, the members are unofficially divided into two classes viz.,

  1.  Taravaniwalas, and
  2. Commission Brokers.

1. Taravaniwalas

The taravaniwalas are to act as dealers in their own name. The taravaniwalas are also allowed to act as brokers. In fact, they frequently change their roles with the object of making as much profit as possible. This is because the business transactions in the Mumbai Exchange are not sufficient to ensure a fair profit for specialization. Hence, they are forced to act in dual capacities.

2. Commission Brokers

A commission broker is similar to the broker of the London Exchange. He generally transacts business on behalf of the members or nonmembers for a commission. But this kind of commission brokers is very little in number. Most of the members prefer to act as taravaniwalas rather than mere brokers.

Non-Members acting for Members in Stock Exchange

Some non-members with limited rights are allowed to enter the house and to act on behalf of members. There are two types of agents who can do business.

1. Remiser

Remiser is one who acts as an agent of a stock exchange. He obtains business for his principal i.e. the member. He gets his remuneration in the form of a commission for the business secured by him.

2. Authorized Clerk

The members of the exchange are also empowered to appoint a fixed number of authorized clerks to transact business on behalf of their employers on the floor of the stock exchange. Authorized clerks are mere employees of the members and not their agents. They are paid a salary plus a commission up to 50% on the business done by them.