Till a few years ago trading on a stock exchange took place through a public outcry or auction system. This has been replaced by an online screen based electronic trading system as almost all exchanges have become electronic. Stock trading has, therefore, shifted from the stock market floor to the broker’s office where trades are executed through a computer. Brokers are members of a stock exchange through whom trading of securities is done. Brokers may be individuals, partnership firms or corporate bodies.
They are the intermediaries between the buyers and sellers. Earlier these members owned, controlled and managed the exchanges. The ownership and management of stock exchanges by brokers often led to a conflict of interest between the brokers and their clients. This led to ‘demutualisation’ of stock exchanges.
Demutualisation separates the ownership and control of stock exchanges from the trading rights of members. This reduces the conflict of interest between the exchange and the brokers and the chances of brokers using stock exchanges for personal gains.
A company’s securities can be traded on a stock exchange only if they are listed or quoted on it. Companies have to fulfill a stringent set of requirements to get their securities listed on a stock exchange. This ensures that the interest of the shareholders is adequately looked after.
Transactions on a stock exchange may be carried out on either cash basis or a carry over basis. The carry over basis is also called badla and is a unique feature of Indian stock markets, particularly the BSE. A stock exchange year is divided into periods called ‘accounts’ which vary from a fortnight to a month. All transactions made during one account are to be settled by payment for purchases and by delivery of share certificates in the case of sales on notified days of the clearing programme of a given stock exchange.
A share certificate is proof of ownership of securities by an individual. Purchase and sale transactions in securities involved the exchange of money in return for the share certificate. This led to problems of theft, forgery, ransfer delays and time involved in paperwork. To eliminate these problems an electronic book entry form of holding and transferring securities has beenintroduced. This is referred to as dematerialisation of securities.