Stock Exchange

March 31, 2008


What is the role of a Stock Exchange in buying and selling shares?

The stock exchanges in India, under the overall supervision of the regulatory authority, the Securities and Exchange Board of India (SEBI), provide a trading platform, where buyers and sellers can meet to transact in securities. The trading platform provided by NSE is an electronic one and there is no need for buyers and sellers to meet at a physical location to trade. They can trade through the computerized trading screens available

with the NSE trading members or the internet based trading facility provided

by the trading members of NSE.

What is Demutualisation of stock exchanges?

Demutualisation refers to the legal structure of an exchange whereby the ownership, the management and the trading rights at the exchange are segregated from one another.

How is a demutualised exchange different from a mutual exchange?

In a mutual exchange, the three functions of ownership, management and trading are concentrated into a single Group. Here, the broker members of the exchange are both the owners and the traders on the exchange and they further manage the exchange as well. This at times can lead to conflicts of interest in decision making. A demutualised exchange, on the other hand, has all these three functions clearly segregated, i.e. the ownership, management and trading are in separate hands.

Currently are there any demutualised stock exchanges in India?

Currently, two stock exchanges in India, the National Stock Exchange (NSE) and Over the Counter Exchange of India (OTCEI) are demutualised.


What is Screen Based Trading?

The trading on stock exchanges in India used to take place through open outcry without use of information technology for immediate matching or recording of trades. This was time consuming and inefficient. This imposed limits on trading volumes and efficiency. In order to provide efficiency, liquidity and transparency, NSE introduced a nationwide, on-line, fullyautomated screen based trading system (SBTS) where a member can punch into the computer the quantities of a security and the price at which he would like to transact, and the transaction is executed as soon as a matching sale or buy order from a counter party is found.

What is NEAT?

NSE is the first exchange in the world to use satellite communication technology for trading. Its trading system, called National Exchange for Automated Trading (NEAT), is a state of-the-art client server based application. At the server end all trading information is stored in an inmemory database to achieve minimum response time and maximum system availability for users. It has uptime record of 99.7%. For all trades entered into NEAT system, there is uniform response time of less than one second.

How to place orders with the broker?

You may go to the broker’s office or place an order on the phone/internet or as defined in the Model Agreement, which every client needs to enter into with his or her broker.

How does an investor get access to internet based trading facility?

There are many brokers of the NSE who provide internet based trading facility to their clients. Internet based trading enables an investor to buy/sell securities through internet which can be accessed from a computer at the investor’s residence or anywhere else where the client can access the internet. Investors need to get in touch with an NSE broker providing this service to avail of internet based trading facility.

What is a Contract Note?

Contract Note is a confirmation of trades done on a particular day on behalf of the client by a trading member. It imposes a legally enforceable relationship between the client and the trading member with respect to purchase/sale and settlement of trades. It also helps to settle disputes/claims between the investor and the trading member. It is a prerequisite for filing a complaint or arbitration proceeding against the trading member in case of a dispute. A valid contract note should be in the prescribed form, contain the details of trades, stamped with requisite value and duly signed by the authorized signatory. Contract notes are kept in duplicate, the trading member and the client should keep one copy each. After verifying the details contained therein, the client keeps one copy and returns the second copy to the trading member duly acknowledged by him.

What details are required to be mentioned on the contract note issued by the stock broker?

A broker has to issue a contract note to clients for all transactions in the form specified by the stock exchange. The contract note inter-alia should have following:

§ Name, address and SEBI Registration number of the Member broker.

§ Name of partner/proprietor/Authorised Signatory.

§ Dealing Office Address/Tel. No./Fax no., Code number of the member given by the Exchange.

§ Contract number, date of issue of contract note, settlement number and time period for settlement.

§ Constituent (Client) name/Code Number.

§ Order number and order time corresponding to the trades.

§ Trade number and Trade time.

§ Quantity and kind of Security bought/sold by the client.

§ Brokerage and Purchase/Sale rate.

§ Service tax rates, Securities Transaction Tax and any other charges levied by the broker.

§ Appropriate stamps have to be affixed on the contract note or it is mentioned that the consolidated stamp duty is paid.

§ Signature of the Stock broker/Authorized Signatory.

What is the maximum brokerage that a broker can charge?

The maximum brokerage that can be charged by a broker from his clients as commission cannot be more than 2.5% of the value mentioned in the respective purchase or sale note.

Why should one trade on a recognized stock exchange only for Buying/selling shares? An investor does not get any protection if he trades outside a stock exchange. Trading at the exchange offers investors the best prices prevailing at the time in the market, lack of any counter-party risk which is assumed by the clearing corporation, access to investor grievance and redressal mechanism of stock exchanges, protection upto a prescribed limit, from the Investor Protection Fund etc.

How to know if the broker or sub broker is registered?

One can confirm it by verifying the registration certificate issued by SEBI. A broker’s registration number begins with the letters ‘INB’ and that of a sub broker with the letters ‘INS’.

What precautions must one take before investing in the stock markets?

Here are some useful pointers to bear in mind before you invest in the markets:

§ Make sure your broker is registered with SEBI and the exchanges and do not deal with unregistered intermediaries.

§ Ensure that you receive contract notes for all your transactions from your broker within one working day of execution of the trades.

§ All investments carry risk of some kind. Investors should always know the risk that they are taking and invest in a manner that matches their risk tolerance.

§ Do not be misled by market rumours, luring advertisement or ‘hot tips’ of the day.

§ Take informed decisions by studying the fundamentals of the company. Find out the business the company is into, its future prospects, quality of management, past track record etc Sources of knowing about a company are through annual reports, economic magazines, databases available with vendors or your financial advisor.

§ If your financial advisor or broker advises you to invest in a company you have never heard of, be cautious. Spend some time checking out about the company before investing.

§ Do not be attracted by announcements of fantastic results/news reports, about a company. Do your own research before investing in any stock.

§ Do not be attracted to stocks based on what an internet website promotes, unless you have done adequate study of the company.

§ Investing in very low priced stocks or what are known as penny stocks does not guarantee high returns.

§ Be cautious about stocks which show a sudden spurt in price or trading activity.

§ Any advise or tip that claims that there are huge returns expected, especially for acting quickly, may be risky and may to lead to losing some, most, or all of your money.

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