Introduction to Indian Stock Market
Technology has become an integral part of our daily life, because of which we have to forget the 1980 stock market, I mean to say working of 1980 stock market, it has to change according to current scenario for better functioning and growth. Bombay Stock Exchange or BSE Limited was started in 1875, as trading exchange. While trading these stocks / Equity, traders have to stand and shout the prices of the stocks for buying and selling. The traders would then exchange the money collected with physical receipts of the shares called share certificates. This resulted in great amount of paper work and headache. The settlement also takes much time approximately 7 to 10 working days.
The settlement of agreements took a huge amount of time because of the requirement to physically deliver the share certificates. The risk associated with these transactions was substantial as the physical securities could be forged, stolen and the handling of the massive amount of paperwork often led to errors.
Towards the end of the 1980s, economic forces, the economic growth and currency crisis emphasized the need for modernization of the financial system. Then our Government decided to create the Securities and Exchange Board of India (SEBI) in 1988.
In April 1992, with market crashing due to Harshad Mehta Scam, then Finance Minister Mr. Manmohan Singh urged the need of another Stock Exchange & with that in November 1992, National Stock Exchange of India Limited (NSE) was established as the first electronically traded Stock Exchange in India. NSE was the first to introduce electronic screen based trading. Three segments of the NSE trading platform were established one after another.
The Wholesale Debt Market (WDM) commenced operations in June 1994 and the Capital Market (CM) segment was opened at the end of 1994. Finally, the Futures and Options segment began operating in 2000.
With the introduction of depository and mandatory dematerialization of shares, chances of fraud reduced further. In 1996, National Securities Depository Limited (NSDL), commenced its operations coining the term dematerialization or demat, as it is commonly known, to mitigate the risks associated with share trading in paper form.
"Dematerialisation is the process through which an investor converts his/ her physical share certificate to electronic form". NSDL holds the securities of investors in electronic form in its Depository system. NSDL interfaces with its investors through its agents called Depository Participants (DPs). If an investor wants to avail the services offered by the Depository, the investor has to open an account with a DP. In India, all demat accounts are currently held by two Depositories, namely National Securities Depository Limited (NSDL) & Central Depository Services (India) Limited (CDSL). NSDL holds 90% of the market share in terms of custody value.
A Demat account secures all the investments that an individual makes in the form of shares, exchange traded funds, government securities, bonds and mutual funds in one place. For online trading, it is necessary for an investor to hold a Demat account.
Process of Dematerialisation of physical shares
Dematerialisation is the process by which you can get physical certificates converted into electronic form.
- Dematerialization starts with opening a Demat account. You need to approach any Depository Participant (DP) of your choice for demat account opening.
- To convert the physical shares into electronic form, a Dematerialization Request Form (to be provided by DP) needs to be filled in and submitted to your DP along with share certificates. On each share certificate, ‘Surrendered for Dematerialization’ needs to be mentioned to avoid any risk on account of loss of certificate in transit.
- The DP will process this request and arrange to send the share certificates to the concerned company or its Registrars and Transfer Agent.
- Once the request is confirmed by the concerned company or its Registrar and Transfer Agent, the share certificates in the physical form will be cancelled and a confirmation of dematerialization will be sent to depository.
- The depository will then confirm the dematerialization of shares to your DP. Once this is done, credit of your securities can be seen in your demat account.
- This cycle generally takes 15 to 30 days after the submission of complete and properly filled up dematerialization request form. Dematerialization is possible only with a demat account.
Dematerialisation & its benefits
Our four fathers were stuck with investment opportunities which were a sum total of saving accounts, term deposits and insurance policies. We however, are blessed with options to choose from which are ranging from high risk-high return, low risk-low return to low risk - guaranteed return. The risk-taking capabilities of an investor decides most of his investment – mutual funds, stocks, Exchange Traded Funds (ETFs), are few names.
This brings us to the subject of dematerialisation. If you want to deal in stocks or ETFs, a demat account is mandatory as all the dealings are carried through this account. In simple terms, a demat account is a place to park all your securities electronically instead of holding them in physical form in your safe deposit locker or at home from where risk of these physical papers getting stolen increases.
With the introduction of dematerialisation, the whole process of buying and selling shares has become smooth and easy. The advantages offered by demat are varied in their usefulness. A demat account makes pledging for shares a hassle-free job and avoids confusion in the ownership title of securities. It also provides an easy receipt of public issue allotment. You can avoid delays in transaction, making you liquidity rich. This is the easiest way to transfer securities, eliminating the risk of forgery and counterfeiting. A single instruction given to the Depository Participant (DP) is capable to bring about any change which you want.
The disadvantages of holding a physical certificate have been completely wiped out by the electronically held demat account offering various advantages over its predecessor. But, the hands down best feature of the demat account is that investors have access to their transaction details through Internet and emails. SEBI has made dematerialisation of physical shares compulsory.
Opening a demat account has never been easier than now. You can open a demat account by approaching any DP of NSDL or DP of CDSL and the procedure is quite simple.
In the Indian Stock Market scenario, there is an upward trend with tremendous growth opportunities for both short term and long term investments. First time investors can go ahead and open their demat account to grasp the benefits. The larger the coverage of instruments under the demat account umbrella, the greater the convenience that you will experience.
Last but not least, a demat account is not for shares only. You can use the same account for mutual fund units, tax saving bonds, debentures, government securities, sovereign gold bonds, national pension Scheme, Fixed Deposits etc.
Important Terminology:
Depository: It can be compared with a bank. A depository holds securities like shares, debentures, bonds, Government Securities, sovereign gold bonds, mutual fund units etc. of investors in electronic form. Besides holding securities, a depository also provides services related to transactions in securities.
Transmission : It is a process by which securities of a deceased account holder are transferred to the account of the surviving joint holder(s)/ legal heirs / nominee of the deceased account holder. This process in case of dematerialised holdings is very convenient as the transmission formalities for all securities held in a demat account can be completed by submitting documents to your DP whereas in case of physical securities the surviving joint holder(s)/ legal heirs/ nominee have to correspond independently with each company in which shares are held.
Bull Market: It is when the share prices are rising and the public is optimistic that the share price will continue to rise
Bear Market: In Bear Market the share prices falls and the public is pessimistic about the stock market. The public becomes fearful and thinks that the market will continue to fall and hence, selling increases in the market.
Broker: It is an individual/organization who is a registered member of the stock exchange and are given license to participate in the securities market in place of its clients. They can directly buy & sell stocks in the share market on behalf of their clients and charge a commission for this service.
Stock Exchange: It is just like a vegetable market, exchanges act as a market where the stock buyers connect with stock sellers. In India we have two well known stock exchanges which are very popular- Bombay stock exchange (BSE) and National stock exchange (NSE).
Index: Since there are thousands of company listed on a stock exchange, hence it’s really hard to track every single stock to evaluate the market performance at a time. Therefore, a smaller sample is taken which is the representative of the whole market. This small sample is called Index and it helps in the measurement of the value of a section of the stock market. The index is computed from the prices of selected stocks.
Registrar and Transfer Agent: An agent appointed by a company to maintain records of security owners. A transfer agent's principal functions are to issue and cancel certificates to reflect changes in ownership of the securities of an entity and to act as an intermediary for the company.
Sources:
Various publications
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cause actual events to differ materially from those expressed or implied in
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