Stock exchange || Share Market

2009-05-14T13:39:00.000-07:00

Attention to investors

2009-02-09T00:05:00.000-08:00

For the attention of investors -
Investment in the equity shares of Bombay Stock Exchange Limited

1.1 Attention of the investors is invited to the Securities Contracts (Regulation) (Manner of Increasing and Maintaining Public Shareholding in Recognised Stock Exchanges) Regulations, 2006, (hereinafter 'the Regulations'), notified by Securities and Exchange Board of India (SEBI) on 13th November,2006.

1.2 Chapter III of the Regulations inter-alia stipulates the shareholding restrictions and eligibility criteria for holding equity shares in the recognized Stock Exchange as under:

1.2.1 Shareholding and transferability restrictions
Regulation 8 (1) of the Regulations provides that no person shall, directly or indirectly, acquire or hold more than five per cent in the paid up equity capital of a recognised stock exchange at any time after commencement of these regulations.

1.2.2 Eligibility criteria for persons acquiring or holding more than one per cent equity shares in a recognised stock exchange

Regulation 9. (1) of the Regulations provides that no person shall, either individually or together with persons acting in concert with him, acquire and/or hold more than one per cent of the paid up equity capital of a recognised stock exchange after commencement of these regulations, unless he is a fit and proper person and has taken prior approval of the SEBI for doing so.

Further, regulation 9(2) provides that for the purpose of sub-regulation (1), a person shall be deemed to be a fit and proper person if -

1. such person has a general reputation and record of fairness and integrity, including but not limited to -
1. financial integrity;
2. good reputation and character; and
3. honesty.
2. such person has not incurred any of the following disqualifications -
1.

the person or any of its whole time directors or managing partners has been convicted by a Court for any offence involving moral turpitude or any economic offence, or any offence against the securities laws;
2. an order for winding up has been passed against the person;
3.

the person or any of its whole time directors or managing partners has been declared insolvent and has not been discharged;
4.

an order, restraining, prohibiting or debarring the person, or any of its whole time directors or managing partners from dealing in securities in the capital market or from accessing the capital market has been passed by the Board or any other regulatory authority and a period of three years from the date of the expiry of the period specified in the order has not elapsed;
5.

any other order against the person or any of its whole time directors or managing partners which has a bearing on the capital market, has been passed by the Board or any other regulatory authority and a period of three years from the date of the order has not elapsed;
6. the person has been found to be of unsound mind by a Court of competent jurisdiction and the finding is in force; and
7. the person is financially not sound.

In terms of regulation 9(3) If any question arises as to whether a person is a fit and proper person, the SEBI's decision on such question shall be final.

2.1 Under the BSE (Corporatisation and Demutualisation) Scheme, 2005 the Exchange has to ensure that "Public" other than shareholders having trading rights continuously hold at least 51% of equity shares of the Exchange.

2.2 In terms of regulation 2 (h) of the Regulations "public" includes any member or section of the public but does not include any share holder of the recognised stock exchange having trading rights therein or any associate of such shareholder;

2.3 According to the clarification received from SEBI vide MRD/DSA/SE/Cir-09/08 dated April 17, 2008 the term "shareholder having trading rights' mentioned in the Regulations would mean a shareholder who has a trading interest in the stock exchange, whether directly or indirectly through a person having trading rights.

Explanation: a shareholder having trading interest 'indirectly' in relation to a person having trading rights would be understood in the same manner as the term 'associate' is in relation to a shareholder having trading rights under regulation 2(1)(b) of the Regulations.

2.4 Attention of the Investors is also invited to the term "Associate" in relation to a shareholder having trading rights in a recognised stock exchange as defined in the Regulations.

In terms of regulation 2 (1) (b) of the Regulations "associate" in relation to a shareholder having trading rights in a recognised stock exchange means a person -

1.

who directly or indirectly, by himself or in combination with other persons, exercises control over such shareholder or holds substantial shares entitling not less than fifteen per cent of the voting rights in such shareholder being a body corporate; or
2.

over whom such shareholder, directly or indirectly, by itself or in combination with other persons, exercises control; or
3.

whose director or partner is also a director or a partner of such shareholder , being a body corporate or a partnership firm, as the case may be; or
4.

who is a holding company or subsidiary company of such shareholder or acompany under the same management as such shareholder; or
5. who is a relative of the shareholder being a natural person under Schedule IA of the Companies Act, 1956 (1 of 1956); or
6. who is a sub-broker of the shareholder in that stock exchange; or
7.

who acts in accordance with instructions of such shareholder in the exercise of voting rights and other rights in the recognised stock exchange, directly or indirectly.

3 Attention of the Investors is further invited to the term "Persons Acting in Concert" [for the purpose of regulation 9(1) of the Regulations] as defined under Securities & Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (SAST Regulations)

In terms of regulation 2 (e) of the SAST Regulations "person acting in concert" comprises,-

1.

persons who, for a common objective or purpose of substantial acquisition of shares or voting rights or gaining control over the target company, pursuant to an agreement or understanding (formal or informal), directly or indirectly co-operate by acquiring or agreeing to acquire shares or voting rights in the target company or control over the target company,
2.

without prejudice to the generality of this definition, the following persons will be deemed to be persons acting in concert with other persons in the same category, unless the contrary is established :
1. a company, its holding company, or subsidiary or such company or company under the same management either individually or together with each other;
2. a company with any of its directors, or any person entrusted with the management of the funds of the company;
3. directors of companies referred to in sub-clause (i) of clause (2) and their associates;
4. mutual fund with sponsor or trustee or asset management company;
5. foreign institutional investors with sub-account(s);
6. merchant bankers with their client(s) as acquirer;
7. portfolio managers with their client(s) as acquirer;
8. venture capital funds with sponsors;
9.

banks with financial advisers, stock brokers of the acquirer, or any company which is a holding company, subsidiary or relative of the acquirer :

Provided that sub-clause (ix) shall not apply to a bank whose sole relationship with the acquirer or with any company, which is a holding company or a subsidiary of the acquirer or with a relative of the acquirer, is by way of providing normal commercial banking services or such activities in connection with the offer such as confirming availability of funds, handling acceptances and other registration work;
10.

any investment company with any person who has an interest as director, fund manager, trustee, or as a shareholder having not less than 2 per cent of the paid-up capital of that company or with any other investment company in which such person or his associate holds not less than 2 per cent of the paid-up capital of the latter company.

Note: For the purposes of this clause "associate" means,-

1. any relative of that person within the meaning of section 6 of the Companies Act, 1956 (1 of 1956); and

2. family trusts and Hindu undivided families.

4.1 In view of the aforesaid provisions, any person desirous of acquiring the shares of Bombay Stock Exchange Limited (BSE) should adhere to the following conditions:

1.

That under the Regulations, there are restrictions on holding (either directly or indirectly) more than 5% of the paid up capital of the BSE;
2.

That under the Regulations there are restrictions on holding (either individually or together with persons acting in concert with him) more than 1% in the paid up equity capital of BSE without complying with "fit and proper" criteria.

4.2

In order to comply with the aforesaid provisions as stipulated by SEBI, investor(s) before acquiring equity share(s) of BSE, are hereby advised to disclose/declare in the prescribed format given hereunder to the Exchange, which inter alia include among other things:

1.

Whether such investor(s) is falling under the category of "Public" / "Trading Member of BSE" / "Associate of shareholder having trading rights in BSE";
2.

details of the persons with whom he is associated [in terms of regulation 2(1)(b) of the Regulations]; and
3.

details of the persons acting in concert [for the purpose of regulation 9(1) of the Regulations] with such investor(s) as defined under SAST Regulations.

2009-01-01T01:31:00.000-08:00

Irrational behavior

2008-03-06T00:53:00.000-08:00

Sometimes the market tends to react irrationally to economic news, even if that news has no real effect on the technical value of securities itself. Therefore, the stock market can be swayed tremendously in either direction by press releases, rumors, euphoria and mass panic.

Over the short-term, stocks and other securities can be battered or buoyed by any number of fast market-changing events, making the stock market difficult to predict.

The behavior of the stock market

2008-03-06T00:52:00.000-08:00

NASDAQ in Times Square, New York City.
NASDAQ in Times Square, New York City.

From experience we know that investors may temporarily pull financial prices away from their long term trend level. Over-reactions may occur— so that excessive optimism (euphoria) may drive prices unduly high or excessive pessimism may drive prices unduly low. New theoretical and empirical arguments have been put forward against the notion that financial markets are efficient.

According to the efficient market hypothesis (EMH), only changes in fundamental factors, such as profits or dividends, ought to affect share prices. (But this largely theoretic academic viewpoint also predicts that little or no trading should take place— contrary to fact— since prices are already at or near equilibrium, having priced in all public knowledge.) But the efficient-market hypothesis is sorely tested by such events as the stock market crash in 1987, when the Dow Jones index plummeted 22.6 percent — the largest-ever one-day fall in the United States. This event demonstrated that share prices can fall dramatically even though, to this day, it is impossible to fix a definite cause: a thorough search failed to detect any specific or unexpected development that might account for the crash. It also seems to be the case more generally that many price movements are not occasioned by new information; a study of the fifty largest one-day share price movements in the United States in the post-war period confirms this. Moreover, while the EMH predicts that all price movement (in the absence of change in fundamental information) is random (i.e., non-trending), many studies have shown a marked tendency for the stock market to trend over time periods of weeks or longer.

Various explanations for large price movements have been promulgated. For instance, some research has shown that changes in estimated risk, and the use of certain strategies, such as stop-loss limits and Value at Risk limits, theoretically could cause financial markets to overreact.

Other research has shown that psychological factors may result in exaggerated stock price movements. Psychological research has demonstrated that people are predisposed to 'seeing' patterns, and often will perceive a pattern in what is, in fact, just noise. (Something like seeing familiar shapes in clouds or ink blots.) In the present context this means that a succession of good news items about a company may lead investors to overreact positively (unjustifiably driving the price up). A period of good returns also boosts the investor's self-confidence, reducing his (psychological) risk threshold.

Another phenomenon— also from psychology— that works against an objective assessment is group thinking. As social animals, it is not easy to stick to an opinion that differs markedly from that of a majority of the group. An example with which one may be familiar is the reluctance to enter a restaurant that is empty; people generally prefer to have their opinion validated by those of others in the group.

In one paper the authors draw an analogy with gambling.[5] In normal times the market behaves like a game of roulette; the probabilities are known and largely independent of the investment decisions of the different players. In times of market stress, however, the game becomes more like poker (herding behavior takes over). The players now must give heavy weight to the psychology of other investors and how they are likely to react psychologically.

The stock market, as any other business, is quite unforgiving of amateurs. Inexperienced investors rarely get the assistance and support they need. In the period running up to the recent Nasdaq crash, less than 1 per cent of the analyst's recommendations had been to sell (and even during the 2000 - 2002 crash, the average did not rise above 5%). The media amplified the general euphoria, with reports of rapidly rising share prices and the notion that large sums of money could be quickly earned in the so-called new economy stock market. (And later amplified the gloom which descended during the 2000 - 2002 crash, so that by summer of 2002, predictions of a DOW average below 5000 were quite common.)

The stock market, individual investors, and financial risk

2008-03-06T00:51:00.000-08:00

Riskier long-term saving requires that an individual possess the ability to manage the associated increased risks. Stock prices fluctuate widely, in marked contrast to the stability of (government insured) bank deposits or bonds. This is something that could affect not only the individual investor or household, but also the economy on a large scale. The following deals with some of the risks of the financial sector in general and the stock market in particular. This is certainly more important now that so many newcomers have entered the stock market, or have acquired other 'risky' investments (such as 'investment' property, i.e., real estate and collectables).

With each passing year, the noise level in the stock market rises. Television commentators, financial writers, analysts, and market strategists are all overtalking each other to get investors' attention. At the same time, individual investors, immersed in chat rooms and message boards, are exchanging questionable and often misleading tips. Yet, despite all this available information, investors find it increasingly difficult to profit. Stock prices skyrocket with little reason, then plummet just as quickly, and people who have turned to investing for their children's education and their own retirement become frightened. Sometimes there appears to be no rhyme or reason to the market, only folly.

This is a quote from the preface to a published biography about the long-term value-oriented stock investor Warren Buffett. Buffett began his career with $100, and $105,000 from seven limited partners consisting of Buffett's family and friends. Over the years he has built himself a multi-billion-dollar fortune. The quote illustrates some of what has been happening in the stock market during the end of the 20th century and the beginning of the 21st.

Relation of the stock market to the modern financial system

2008-03-06T00:49:00.000-08:00

The financial system in most western countries has undergone a remarkable transformation. One feature of this development is disintermediation. A portion of the funds involved in saving and financing flows directly to the financial markets instead of being routed via banks' traditional lending and deposit operations. The general public's heightened interest in investing in the stock market, either directly or through mutual funds, has been an important component of this process. Statistics show that in recent decades shares have made up an increasingly large proportion of households' financial assets in many countries. In the 1970s, in Sweden, deposit accounts and other very liquid assets with little risk made up almost 60 per cent of households' financial wealth, compared to less than 20 per cent in the 2000s. The major part of this adjustment in financial portfolios has gone directly to shares but a good deal now takes the form of various kinds of institutional investment for groups of individuals, e.g., pension funds, mutual funds, hedge funds, insurance investment of premiums, etc. The trend towards forms of saving with a higher risk has been accentuated by new rules for most funds and insurance, permitting a higher proportion of shares to bonds. Similar tendencies are to be found in other industrialized countries. In all developed economic systems, such as the European Union, the United States, Japan and other developed nations, the trend has been the same: saving has moved away from traditional (government insured) bank deposits to more risky securities of one sort or another.

Importance of stock market

2008-03-06T00:25:00.000-08:00

Function and Purpose

The stock market is one of the most important sources for companies to raise money. This allows businesses to go public, or raise additional capital for expansion. The liquidity that an exchange provides affords investors the ability to quickly and easily sell securities. This is an attractive feature of investing in stocks, compared to other less liquid investments such as real estate.

History has shown that the price of shares and other assets is an important part of the dynamics of economic activity, and can influence or be an indicator of social mood. Rising share prices, for instance, tend to be associated with increased business investment and vice versa. Share prices also affect the wealth of households and their consumption. Therefore, central banks tend to keep an eye on the control and behavior of the stock market and, in general, on the smooth operation of financial system functions. Financial stability is the raison d'être of central banks.

Exchanges also act as the clearinghouse for each transaction, meaning that they collect and deliver the shares, and guarantee payment to the seller of a security. This eliminates the risk to an individual buyer or seller that the counterparty could default on the transaction.

The smooth functioning of all these activities facilitates economic growth in that lower costs and enterprise risks promote the production of goods and services as well as employment. In this way the financial system contributes to increased prosperity.

Behavior of stock market in 2005

2008-03-06T00:17:00.000-08:00

A combination of rising domestic interest rates and volatile fuel markets left U.S. stocks trading flat to lower for much of 2005 before a rally late in the year pushed the broad market into positive territory. The Standard & Poor's (S&P) 500 index ended up 3.00%. The Nasdaq (National Association of Securities Dealers automated quotations) composite index gained 1.37%, but the Dow Jones industrial average (DJIA), composed of 30 of the market's most respected stocks, ended the year down 0.61%.

Market participants

2008-03-03T02:49:00.000-08:00

Many years ago, worldwide, buyers and sellers were individual investors, such as wealthy businessmen, with long family histories (and emotional ties) to particular corporations. Over time, markets have become more "institutionalized"; buyers and sellers are largely institutions (e.g., pension funds, insurance companies, mutual funds, hedge funds, investor groups, and banks). The rise of the institutional investor has brought with it some improvements in market operations. Thus, the government was responsible for "fixed" (and exorbitant) fees being markedly reduced for the 'small' investor, but only after the large institutions had managed to break the brokers' solid front on fees (they then went to 'negotiated' fees, but only for large institutions).However, corporate governance (at least in the West) has been very much adversely affected by the rise of (largely 'absentee') institutional 'owners.'

Trading

2008-02-29T02:56:00.000-08:00

Participants in the stock market range from small individual stock investors to large hedge fund traders, who can be based anywhere. Their orders usually end up with a professional at a stock exchange, who executes the order.

Some exchanges are physical locations where transactions are carried out on a trading floor, by a method known as open outcry. This type of auction is used in stock exchanges and commodity exchanges where traders may enter "verbal" bids and offers simultaneously. The other type of exchange is a virtual kind, composed of a network of computers where trades are made electronically via traders.

Actual trades are based on an auction market paradigm where a potential buyer bids a specific price for a stock and a potential seller asks a specific price for the stock. (Buying or selling at market means you will accept any ask price or bid price for the stock, respectively.) When the bid and ask prices match, a sale takes place on a first come first served basis if there are multiple bidders or askers at a given price.

The purpose of a stock exchange is to facilitate the exchange of securities between buyers and sellers, thus providing a marketplace (virtual or real). The exchanges provide real-time trading information on the listed securities, facilitating price discovery.

The New York Stock Exchange is a physical exchange, also referred to as a listed exchange — only stocks listed with the exchange may be traded. Orders enter by way of exchange members and flow down to a specialist, who goes to the floor trading post to trade stock. The specialist's job is to match buy and sell orders using open outcry. If a spread exists, no trade immediately takes place--in this case the specialist should use his/her own resources (money or stock) to close the difference after his/her judged time. Once a trade has been made the details are reported on the "tape" and sent back to the brokerage firm, which then notifies the investor who placed the order. Although there is a significant amount of human contact in this process, computers play an important role, especially for so-called "program trading".

The NASDAQ is a virtual listed exchange, where all of the trading is done over a computer network. The process is similar to the New York Stock Exchange. However, buyers and sellers are electronically matched. One or more NASDAQ market makers will always provide a bid and ask price at which they will always purchase or sell 'their' stock. [2].

The Paris Bourse, now part of Euronext, is an order-driven, electronic stock exchange. It was automated in the late 1980s. Prior to the 1980s, it consisted of an open outcry exchange. Stockbrokers met on the trading floor or the Palais Brongniart. In 1986, the CATS trading system was introduced, and the order matching process was fully automated.

From time to time, active trading (especially in large blocks of securities) have moved away from the 'active' exchanges. Securities firms, led by UBS AG, Goldman Sachs Group Inc. and Credit Suisse Group, already steer 12 percent of U.S. security trades away from the exchanges to their internal systems. That share probably will increase to 18 percent by 2010 as more investment banks bypass the NYSE and NASDAQ and pair buyers and sellers of securities themselves, according to data compiled by Boston-based Aite Group LLC, a brokerage-industry consultant [citation needed].

Now that computers have eliminated the need for trading floors like the Big Board's, the balance of power in equity markets is shifting. By bringing more orders in-house, where clients can move big blocks of stock anonymously, brokers pay the exchanges less in fees and capture a bigger share of the $11 billion a year that institutional investors pay in trading commissions[citation needed].

[edit] Market participants

Many years ago, worldwide, buyers and sellers were individual investors, such as wealthy businessmen, with long family histories (and emotional ties) to particular corporations. Over time, markets have become more "institutionalized"; buyers and sellers are largely institutions (e.g., pension funds, insurance companies, mutual funds, hedge funds, investor groups, and banks). The rise of the institutional investor has brought with it some improvements in market operations. Thus, the government was responsible for "fixed" (and exorbitant) fees being markedly reduced for the 'small' investor, but only after the large institutions had managed to break the brokers' solid front on fees (they then went to 'negotiated' fees, but only for large institutions).

However, corporate governance (at least in the West) has been very much adversely affected by the rise of (largely 'absentee') institutional 'owners.'

History of stock exchanges

2008-02-25T06:35:00.000-08:00

In 11th century France the courtiers de change were concerned with managing and regulating the debts of agricultural communities on behalf of the banks. As these men also traded in debts, they could be called the first brokers.
Some stories suggest that the origins of the term "bourse" come from the Latin bursa meaning a bag because, in 13th century Bruges, the sign of a purse (or perhaps three purses), hung on the front of the house where merchants met.
However, it is more likely that in the late 13th century commodity traders in Bruges gathered inside the house of a man called Van der Burse, and in 1309 they institutionalized this until now informal meeting and became the "Bruges Bourse". The idea spread quickly around Flanders and neighbouring counties and "Bourses" soon opened in Ghent and Amsterdam.
In the middle of the 13th century, Venetian bankers began to trade in government securities. In 1351, the Venetian Government outlawed spreading rumors intended to lower the price of government funds. There were people in Pisa, Verona, Genoa and Florence who also began trading in government securities during the 14th century. This was only possible because these were independent city states ruled by a council of influential citizens, not by a duke.
The Dutch later started joint stock companies, which let shareholders invest in business ventures and get a share of their profits - or losses. In 1602, the Dutch East India Company issued the first shares on the Amsterdam Stock Exchange. It was the first company to issue stocks and bonds. In 1688, the trading of stocks began on a stock exchange in London.