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Unit IVStock Exchanges Q1) Describe the functions of Stock Exchanges?A1) A stock exchange standardizes investments, allowing people to buy or sell discrete and equal shares of ownership in various companies. It facilitates the transfer of funds between investors and businesses, regulating as necessary to provide maximum safety for everyone’s investments. Many stock exchanges exist. The major ones act as barometers of the economic performances of various countries. Individual InvestorsStock markets allow investors to put their money to good use in a business without dealing with all the hassles of actually owning and running a company. If investors choose wisely, they make money through their investments. In return, the companies they invested in get to use the influx of money to develop their businesses. Individual investors get a chance to participate in and benefit from the growth of various businesses, while limiting their risk to no more than what they invested.Economic BenefitsOn the scale of a full economy, the stock market is where people can invest their savings in the development of a country. Investors have their individual motivations -- generally, personal profit -- but taken together, investors’ decisions about where they will invest their money usually end up rewarding the companies with the greatest potential for growth and punishing under-performing or unhealthy companies. In other words, the stock market efficiently distributes money to the companies where it does the most good, which strengthens the entire economy.LiquidityHealthy speculation involves analyzing a company to determine a reasonable price for its stock and then making an investment choice based on whether you think its current price in the stock market is too high or too low. The combined effect of many speculators is to create a liquid market, which means buyers and sellers are equally divided at the current stock price. In other words, if half of speculators are pessimistic about a company and half are optimistic, chances are someone will be willing to buy or sell its stock at the current price.Raising CapitalFor businesses that lack the resources necessary for growth, selling shares on the stock market can provide an infusion of capital, which a company’s can then use to develop and strengthen the organization. For example, suppose a company has an idea for a new product but can’t afford to produce and market it. The company can sell shares of itself on a stock exchange, trading partial ownership for the chance to increase the company’s value. Q2) Describe the method of trading on a Stock Exchange.A2) The Trading procedure involves the following steps:1. Selection of a broker:The buying and selling of securities can only be done through SEBI registered brokers who are members of the Stock Exchange. The broker can be an individual, partnership firms or corporate bodies. So the first step is to select a broker who will buy/sell securities on behalf of the investor or speculator.2. Opening Demat Account with Depository:Demat (Dematerialized) account refer to an account which an Indian citizen must open with the depository participant (banks or stock brokers) to trade in listed securities in electronic form. Second step in trading procedure is to open a Demat account.The securities are held in the electronic form by a depository. Depository is an institution or an organization which holds securities (e.g. Shares, Debentures, Bonds, Mutual (Funds, etc.) At present in India there are two depositories: NSDL (National Securities Depository Ltd.) and CDSL (Central Depository Services Ltd.) There is no direct contact between depository and investor. Depository interacts with investors through depository participants only.Depository participant will maintain securities account balances of investor and intimate investor about the status of their holdings from time to time.3. Placing the Order:After opening the Demat Account, the investor can place the order. The order can be placed to the broker either (DP) personally or through phone, email, etc.Investor must place the order very clearly specifying the range of price at which securities can be bought or sold. e.g. “Buy 100 equity shares of Reliance for not more than Rs 500 per share.”4. Executing the Order:As per the Instructions of the investor, the broker executes the order i.e. he buys or sells the securities. Broker prepares a contract note for the order executed. The contract note contains the name and the price of securities, name of parties and brokerage (commission) charged by him. Contract note is signed by the broker.5. Settlement:This means actual transfer of securities. This is the last stage in the trading of securities done by the broker on behalf of their clients. There can be two types of settlement.(a) On the spot settlement:It means settlement is done immediately and on spot settlement follows. T + 2 rolling settlement. This means any trade taking place on Monday gets settled by Wednesday.(b) Forward settlement:It means settlement will take place on some future date. It can be T + 5 or T + 7, etc. All trading in stock exchanges take place between 9.55 am and 3.30 pm. Monday to Friday. Q3) Describe the factors affecting Regulation and Control of Stock Exchanges.A3) While the performance of an individual company varies in the stock market due to news about its performance, such as earnings reports and acquisition announcements, there are outside influences that will affect stocks and the market as a whole. These factors include, but aren't limited to: economics, politics, natural disasters, man-made disasters and market psychology.EconomicsMacro-economic factors such as interest rates, inflation, unemployment and economic growth often move stock markets. Stock markets are always rooting for more economic growth, because it usually means more profits for companies, and more profits tend to grow the value of stocks. Declining interest rates often send markets higher, because they are seen as a harbinger of economic growth. High inflation has the opposite effect, because it signals that interest rates will be rising in the immediate or near future, thus slowing economic growth. Rising unemployment foreshadows lower economic growth, and falling unemployment tells stock investors that growth is on the way. When these data are reported, they can move stocks, but they may not if the numbers are more or less what investors expected. Nevertheless, if you're investing in stocks, it's important to keep an eye on these numbers. They can often predict whether the market as a whole will go up or down.PoliticsA belief by investors that control of the government by one party or the other will hurt or benefit them can move the market as whole. This is especially true in times of intense domestic turmoil. Significant developments abroad also can affect U.S. markets. An election involving one of our major trading partners that brings to power an avowedly hostile government can push markets lower. However, the converse is also true. The election of a friendly foreign government can move markets higher. These are scenarios we might see in trading partners with democracies. In non-democratic countries with which we trade, coups, general strikes and revolutions may be more likely. The positive or negative effect on the stock market would depend on the country and the circumstances, but uncertainty generally moves markets lower.Natural and Man-Made DisastersNatural or man-mad disasters with economic consequences also affect stock markets. If an earthquake happens in a bustling city where there's lots of economic activity, markets will move down as investors fear a negative impact on economic growth. Similarly, if there's a disaster at a man-made facility of economic importance, such as an oil refinery blowing up, it can put downward pressure on stock prices.Market PsychologyAt the end of the day, swings in the stock market are caused by human beings. There are boom periods in a rising market when everyone wants to buy. Alternatively, there are also periods of panic when almost every investor is scrambling to sell. Q4) Describe Online Trading.A4) Online Trading has created a lot of opportunities for new-age traders. If you are a stock market enthusiast and want to Trade Online then, this can be the best time to start investing online.With the advent of the technologies that are used in the trading arena, it is becoming better day by day for the traders. Online trading is more or less like you do online shopping.You just need a few basic things like a bank account, internet connection, and internet banking facilities. Along with these, last but not the least, a device from which you can place the order.It is the same for online trading as well – A Demat account, trading account and bank account, internet facility and trading platform on your device and you are sorted.Online Trading of Shares means you have an online platform where you can buy or sell shares. So, Online Trading Meaning is as simple as it sounds. You buy and sell the securities online and the fund is also transferred online.Online TradingWith the online trading platform, you can trade different types of investment vehicles. There are stocks – equities, commodities, mutual funds, and other investment vehicles as well.Online trading facilitates the trading process by bringing the complete trading setup at your convenience. You can trade anytime and from anywhere using the online platforms.There is no paperwork involved, no need to go to the brokerage house or the stock exchange to trade shares. It is all there on the device which you use – laptop/tablet/desktop or mobile.With a good internet connection, you can check your investment all the time. You can monitor and place your bids and trade shares anytime. Q5) How you can Trade Online? A5) Steps of Online TradingIf you are wondering How to do Online Trading there is a simple guide for the same. You can Trade Online by following these below-mentioned steps –Firstly, you need to open a Demat account. As you may know, this is the account that holds all your investments – equities, commodities and other investments. Demat account is provided by brokerage houses, so you need to find a good broker and open the account. Make sure the brokerage house is registered with SEBI. You should also check the brokerage charges and other charges the firm charge for their services. You will get the trading platforms, a trading account with it for trading.Secondly, you need to learn the basics of the market. You must understand and able to predict market movements. For the same, you can take up online classes, or some trading courses, and also read yourself from online portals.Thirdly, you need to put your learning in action. By this, we mean you need to practice what you learned. Before entering the market with real money at stake, it is better to practice with some demo accounts and virtual money. There are different stock simulator which can help you practice trading. Since you are not investing any real money, there is no fear of losing any.Finally, you need to plan your trading strategies. You need to decide the investment goal, investment budget and the result you want. Accordingly, you need to set the investment strategy. Q6) What are the benefits of online trading?A6) Benefits of Online TradingThe Online Trading of Stocks has various benefits of its own like –Online trading is quite simple. It works fast and effectively. This enables many stock market enthusiasts to trade on their own without any hassle. It takes little time to execute orders. You can place orders with shortcut keys saving your time. With the online platform, there is no need to visit the brokerage house or stock exchange, which saves your time as well and effort. The expenses of trading have gone down as well with trading online process. The maintenance costs and other charges are reduced by the brokerage houses on trading. Online Trading Academy helps in learning about the stock market. Big brokerage houses have online trading academy which enables you to read from their resources on trading and the stock market, You have full control over your investments when trading online. You place your trades, monitor them as and when you want, check your portfolio and do the changes if required. Online trading makes your trading experience errorless to a great extent. As there is no paper trail, miscommunications can be avoided. You have access to the research reports of various companies on your trading platform only. You do not have to go places to look for the reports. One can easily find them all on the trading platform for analysis. There are also technical analysis tools on trading platforms which is a boon for the daily traders. It has become possible with the online trading facility and trading platforms. Q7) What are products and services?A7) A product is a tangible item that is put on the market for acquisition, attention, or consumption, while a service is an intangible item, which arises from the output of one or more individuals. Although it seems like the main distinction between the two concepts is founded on their tangibility, that is not always the case. In most cases services are intangible, but products are not always tangible.Products and Services One thing to keep in mind is that products and services are closely aligned. In fact, a majority of products carry with them an element of service. For example, when a consumer buys a car, the product comes with a lot of other service responsibilities, such as tune-up and maintenance. Q8) Differentiate between products and services.A8) There is a clear difference between the two concepts, and it’s imperative for one to understand their working definitions.Tangible vs. IntangibleAssessing the quality of a tangible product is very easy. Since most products are countable, touchable, and visible, a consumer can assess its durability by examining it. A good case in point is when an individual is buying a home. The buyer will check every nook and cranny of the house, including the attic, basement, foundation, each individual room, and more.In contrast, a service is not something that one can feel or try out before paying for it. Say an individual needs a professional inspector to identify any hidden issues before deciding to purchase a home. Just how experienced is the inspector with regard to plumbing, roofing, and other structural matters?In a nutshell, the client lacks sufficient knowledge about the inspector’s expertise until the task is already in progress. The customer can read online reviews, ask for the inspector’s credentials, as well as before and after pictures of his previous work, but there’s no definite way of evaluating the quality of a service until it’s rendered.Production vs. InteractionA potential car buyer usually checks the car’s body lines, feels the leather used on the seats, and takes the car for a test drive before deciding whether to buy the car or not. Since it’s a product, the buyer is aware of the specific production line the vehicle hails from, and there are many more like it. In fact, there are other cars identical to the one being bought.But what about the service the car buyer receives from the car dealer? The way a car salesperson interacts with one buyer is not the same way he interacts with another buyer. If the car buyer is lucky, he may find a salesperson who is well-informed, courteous, and is willing to negotiate. If he’s not, the car salesperson might be one who lacks information or behaves in a nonchalant way.Perishable vs. ImperishableThe best way to illustrate perishable products is to consider a restaurant owner. If such an individual does not understand the concept of spoilage and waste reduction, he risks ruining his business since most fresh foods spoil within a few days. Another example is technology. Even some intangible products like software become obsolete at some point. Imperishable products include items like jewelry and automobile parts.However, does the distinction between perishable and imperishable exist in services? Services can be described as perishable but not imperishable. A perishable service simply means that it’s short-lived. Ideally, such a service is consumed as soon as it is produced. Unlike products, the service cannot be stored for later use.Perishable services are such as airline flights, auto repair, theater entertainment, and manicures. If an individual purchases an air ticket for a particular day, and then he suffers a cold and is not able to travel, the ticket expires. The perishable attribute of some services makes it hard to balance supply and demand.The Growing Demand for Products and ServicesBased on history, it is evident that producers need to adapt or replace products once they become outdated. Consider the way websites and e-books have replaced paper books or how compact discs have replaced cassettes and DVDs. In other instances, services have also become a substitute for certain products. For instance, the streaming services offered by entertainment firms like Netflix are now preferred by many to DVD and cable or satellite television programs. Q9) Write a note on speculation in stock exchange.A9) In every financial market, speculation plays a key role. On some exchanges with cheap stocks, speculative trades are the primary trades happening. Here, we'll discuss the role speculation plays in these financial markets.Speculative Stock TransactionsHave you ever seen an advertisement for someone that claims to have turned $1,000 into millions of dollars? While the stock market makes that possible, it is extremely - extremely - unlikely. But, if someone picks the right trades and speculates accurately, there's no telling what might happen!The stock market and all its fluctuations are entirely based on the millions of transactions that occur between buyers and sellers each day. Each of these buyers and sellers have different reasons for their activity, but all, at least a little bit, are based in speculation. As it relates to the stock market, speculation is the anticipation of future price movement based on a belief the market has inaccurately priced the stock.While all stock trading has some degree of speculation, speculative trades have an especially high impact within financial markets. Speculative trades are trades that involve companies that, for some reason, have a high risk/high reward profile.This means that there is a lot of risk in the investment, perhaps so much that one could lose a significant amount of money, but, if the trade goes well, it could appreciate rapidly and make someone a lot of money in a relatively short amount of time.Speculative TradesMost speculative trades involve new companies that may not have a history of profitability or positive cash flow, but that have a business plan or some other strategic advantage that entices market participants to buy shares of their stock.For example, a newly established technology company may be seeking funding and turn to the equity financial markets. Because they aren't established, they wouldn't be listed on the New York Stock Exchange (NYSE) or NASDAQ. Instead, they would be published on what is referred to as 'pink slips'. The pink slips are an unregulated stock market, where many stocks trade for less than $1.The pink slips, or 'penny stocks,' are very speculative. The high risk part of the speculative means that there is a very good chance that the investor may lose some, or all, of their money.However, If you are able to buy a technology firm for $.10 per share, and the innovation they have hits marketing hard or they get by purchased by a larger firm, perhaps those shares move to $10 a share. That is a 100x return! If you originally spent $50 buying 500 shares, your $50 investment is now worth $5,000.If you see or consider a trade opportunity like this and after your analysis it is clearly a 'lose it all or make a lot of money,' then you are likely looking at a speculative trade. Q10) Write a note on Risk and Return Opportunity on Speculation in Stock Exchanges.A10) Risk and Return OpportunityA stock price can fall all the way to zero, although you'll see many stocks on the pink slips that still trade at a fraction of a cent. These are the companies that are hanging on to their cash and liquid assets, or assets that can be easily converted to cash, for as long as they can, which is why they are listed so cheaply on the pink slips anyway.Unlike companies listed on the New York Stock Exchange or other mainstream exchanges, these speculative companies are generally not making a profit and paying earnings back out to investors or reinvesting in their own growth.Regardless of how much you invest in these stocks - if it's $10 or $1,000 - you have a higher than likely chance of losing all that money. But, the other side of that risk - albeit still very unlikely - you might have your money sitting on next year's Google and hit a homerun. Those trades, however, are very speculative. They are completely based on the slim chance that those trades might turn very profitable.
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