Get ASSEB/AHSEC Class 12 Finance Chapter-11 Stock Exchange Important Questions Answers 2025 for Assam State School Education Board Division - II Examination.
Chapter: 11 Stock Exchange
Stock Exchange
1. What is a stock exchange? Give some Examples
Ans: A stock exchange is like a marketplace where people buy and sell things like shares of companies, bonds and other financial assets. It’s a place where companies can offer their stocks to investors who want to buy them. Everything happens in a controlled environment with strict rules to ensure fairness and transparency. Essentially, it’s where securities are traded following specific guidelines.
According to Securities Contracts (Regulation) Act 1956, “a stock exchange is an association, organization or body of individuals whether incorporated or not, established for the purpose of assisting, regulating or controlling the business of buying, selling and dealing in securities”. Some examples of stock exchange are:
Bombay Stock exchange (BSE) [oldest stock exchange in India], Delhi Stock Exchange, Calcutta Stock Exchange, The National Stock Exchange (NSE), Over the Counter Exchange of India (OTCEI), NASDAQ (National Association of Securities Quotations), LSE (London Stock Exchange), NYSE (New York Stock Exchange) etc.
2. Write a short note on stock exchange.
Ans: A stock exchange is like a marketplace where people buy and sell ownership shares in companies. It’s a regulated space where these transactions happen fairly and transparently. In the past, stock exchanges were physical places where brokers shouted orders to buy or sell. Nowadays, most stock exchanges are online, using computers to match buyers and sellers. The first virtual stock exchange, NASDAQ (National Association of Securities Quotations), started in 1971 and now, all stock exchanges are virtual.
For a company to be part of a stock exchange, it needs to meet certain requirements, like having a certain number of shareholders, making money and having a certain stock price. Once a company meets these requirements, its shares can be traded on the stock exchange, which helps the company gain visibility in the global market. Stock exchanges are a crucial part of the financial system. They are where companies get the long-term funds they need. The more activity in the stock exchange, the better it usually reflects the overall economic health of a country. So, stock exchanges are like economic indicators for financial well-being of a nation.
3. Discuss the features of a stock exchange.
Ans:- The features of a stock exchange are:
1. Market for Securities: stock exchange is a place where we can buy and sell various types of financial assets like stocks and bonds of different companies.
2. Trading in Existing Securities: Stock exchanges deal with securities like shares and bonds that have already been issued by companies.
3. Regulated Trading: The stock exchange doesn’t buy or sell securities itself. Instead, brokers and exchange members handle the transactions on behalf of buyers and sellers.
4. Dealing in Listed Securities Only: Only the securities that are officially listed on a particular stock exchange can be traded there.
5. Transactions and Authorized Brokers: Transactions on the stock exchange must be conducted through approved brokers and members.
6. Government Recognition: A stock exchange needs to be officially recognized by the government of the country it operates in, following certain formalities.
7. Business Indicator: It serves as a way to measure and show how well a business is doing through stock market indices.
8. Operates as per rules: All activities on the stock exchange are governed by specific rules and regulations, including guidelines set by regulatory authorities like SEBI.
4. What are the functions of stock exchange?
Ans: The stock exchange has many important functions in the economy of a country. They are as follows:
1. Providing a Continuous Market: Stock exchanges offer a place where securities like stocks and bonds are
constantly bought and sold. Once these securities are listed on an exchange, they can be traded regularly. 2. Evaluating Securities: Investors can assess the value of their investments by looking at the prices of
securities on stock exchanges. These prices are determined by supply and demand, so they reflect a company’s performance and stability. 3. Ensuring Liquidity: Stock exchanges enable investors to turn their shares and stocks into cash whenever
needed. There are always buyers and sellers in the stock market, ensuring liquidity.
4. Mobilizing Savings and Encouraging Investment: Stock exchanges encourage people to invest their savings by buying shares, bonds, etc. This helps channel savings into investments, contributing to capital formation.
5. Facilitating Fund Movement: Stock exchanges make it easy for both investors and companies to raise and allocate funds. Banks also provide funds for stock market transactions, promoting fund mobility.
6. Ensuring Fund Safety: Transactions on stock exchanges are regulated by laws like the Securities Contracts (Regulation) Act, 1956. Only reputable companies can list their shares, ensuring the safety of investors’ funds.
7. Platform for Public Debt: Stock exchanges provide a platform for governments to raise funds through the sale of government securities. They also function as organized markets for trading in these securities.
8. Supplying Long-Term Funds: Securities traded on stock exchanges are transferable with minimal formalities. This means companies can secure long-term funds easily when they issue securities.
9. Assisting with New Issues: Stock exchanges help market new securities. When these new issues are listed on exchanges, they become more attractive to the public, increasing investment.
10. Control Over Companies: Listed companies must submit annual reports and audited balance sheets to stock exchanges. Only legitimate companies can trade their shares on the exchange, ensuring proper oversight.
11. Economic Barometer: Stock exchanges act as economic indicators, reflecting the overall state of the economy. Changes in share prices are closely monitored and can provide insights into economic health. Thus, stock exchanges play a vital/crucial role in mobilizing funds, promoting investment and providing a transparent platform for trading securities, benefiting both investors and companies. These also serve as a crucial barometer for assessing the economic condition of a nation.
5. What is meant by Listing of Stocks? Write its objectives.
Ans: A vital stage in the stock market is the listing of securities, which involves approving the trading of certain securities on a particular stock exchange.
Meaning of Listing: Listing is the process of permitting specific securities to be traded on a particular stock exchange. In essence, it’s like giving permission for these securities to be bought and sold in that stock market.
Listing is mandatory for companies that want to offer their shares and debentures to the public through a prospectus. Additionally, India’s Securities and Exchange Board (SEBI) requires listing to grant permission for new issues by public limited companies. Financial Institutions also require listed shares for underwriting new issues. The process of listing follows the rules and regulations set by both the Stack Exchange and SEBI.
Various records and documents must be maintained during the listing process.
Objectives of Listing:
(a) Enhancing Liquidity: Listing provides a marketplace where securities can be easily bought and sold, increasing their liquidity. This is beneficial for investors who want to convert their investments into cash quickly,
(b) Effective Control and Supervision: Listing allows for better control and supervision of the trading of these securities. Regulatory bodies can monitor transactions more effectively, ensuring fairness and transparency.
(c) Mobilizing Savings: Listing encourages people to invest their savings in the securities market. In consequence, it contributes to economic development by channeling savings into investments.
(d) Negotiability: Listed securities can be freely traded on the stock exchange, making them easily negotiable. This flexibility benefits investors who want to buy or sell these securities.
(e) Raising Capital: Companies with listed securities have the advantage of raising additional capital by issuing more shares. Investors are more willing to invest in companies with listed securities, which can help companies expand and grow.
5. What are the formalities required for Listing of Securities?
Ans: Listing securities on a stock exchange involves several formalities to ensure transparency and compliance with regulations. Here are the necessary formalities and documents required for listing securities:
(a) Application: The company wishing to list its securities must submit an application in the prescribed format to the relevant stock exchange.
(b) Legal Documents: The company has to submit certified copies of essential legal documents, including the Memorandum of Association, Articles of Association, Prospectus (or Statement in lieu of Prospectus), underwriting agreements and agreements with vendors and promoters.
(c) Specimen Copies: specimen copies of shares and debentures, along with documents related to share issuance such as letters of call, allotment letters, acceptance letters and renunciation letters should be submitted.
(d) Financial Statements: it has to submit copies of audited accounts and balance sheets for the past five years to demonstrate the financial health and performance of the company.
(e) Offer Documents: The company has to submit copies of any offers for sale, circulars, or advertisements related to the offering of securities over the past five years.
(f) Management Agreements: The company has to submit certified copies of agreements made with managerial personnel, outlining their roles and compensation.
(g) Dividend History: It should furnish particulars of dividends and bonuses paid by the company over the last ten years, as well as any arrears of dividends and interests, if applicable.
(h) Company History: A brief history of the company since its establishment, detailing its activities and major milestones should be submitted.
(i) Capital Structure: It has to Provide details of the capital structure of company, including the types and classes of shares and debentures issued.
(j) Shareholder Information: A statement showing the distribution of shares and a list of the top ten shareholders for each class of securities, along with the number of securities held by them should be submitted.
(k) Forfeited Shares: It should furnish any shares that have been forfeited by shareholders.
(l) Agreements with Intermediaries: The company has to submit certified copies of agreements made between the company and financial intermediaries, if applicable.
(m) Listing Agreement: it has to submit a signed listing agreement, which outlines the terms and conditions for listing on the stock exchange and pay the listing fee as required.
These formalities and documents are essential to ensure that the listing process is conducted transparently and in compliance with regulatory requirements. They provide investors with the necessary information to make informed decisions about trading these securities on the stock exchange.
7. What are the conditions to be fulfilled by a company to get their securities listed on a recognized stock exchange?
Ans: A company must fulfill the following criteria to get their securities listed on a recognized stock exchange:
(a) Public Offering: The company should offer at least 60% of each class of its securities to the public for subscription and the minimum issued capital should amount to Rs 3 crore.
(b) Minimum Public Offer: A minimum of 25% of each issue should be offered to the public and this offering must be advertised.
(c) Company Size: The company should have a substantial size with a diverse capital structure, reflecting broad public interest in its securities.
(d) Shareholder Requirements: The company should have at least 10 shareholders for every Rs 1 Lac of fresh shares issued during the initial offering and increase this to 20 shareholders in subsequent issues.
(e) Multiple Stock Exchanges: Companies with a paid-up capital exceeding Rs 5 crore should list their securities on more than one stock exchange.
(f) Interest on Excess Funds: The company is required to pay interest on excess funds received during the application process.
(g) Articles of Association: The company’s Articles of Association must include the following provisions:
(i)The use of a standard form for share transfers.
(ii) Fully paid shares should be free from any liens.
(iii) Partly paid-up shares can only be subject to liens for call money due at specific times.
(iv). Calls made in advance should only carry interest and not dividend rights.
(h) Expenditure Limit: Existing companies must adhere to the maximum expenditure limit for public issues.
(i) Promoters’ Quota: The company must provide a certificate confirming that shares from the promoters’ quota will not be sold or transferred for a period of three years.
These conditions ensure transparency and compliance for companies seeking to list their securities on a recognized stock exchange.
8. Who is stock broker? What are the qualifications of a stock broker?
Ans: A stock broker is an intermediary who conducts securities transactions on behalf of their clients within the stock exchange. These stock brokers are registered members of the stock exchange and to operate in this capacity, they must register their names with the SEBI (Securities and Exchange Board of India). Since individuals holding securities are not permitted to engage in direct trading, the role of a broker becomes essential.
Qualifications Required for a Stock Broker:
(a) He/She must be an Indian citizen and at least 21 years old.
(b) He/She should not have a history of bankruptcy or compounded with creditors.
(c) No prior convictions for any criminal offenses should be on their record.
(d) He/She must not be involved in any other business concurrently.
(e) He/She should not be in default of any obligations within any stock exchange.
f) He/She must have 12th standard examination certificate.
or
How can anyone become a registered stock broker?
Ans: The registration process for a stock broker involves several steps, which can be outlined as follows:
(a) Submission of Application: The prospective stock broker is required to complete Form A, which is then submitted to the SEBI (Securities and Exchange Board of India) for consideration.
(b) Trading and Clearing Member Registration: If the stock broker intends to function as both a Trading and/or a Clearing Member, they must also complete Form AA for registration with the SEBI.
(c) Review by Membership Services Department: The submitted application is initially reviewed by the Membership Services Department of the Stock Exchange where the broker seeks membership.
(d) Evaluation by Committees: The application then proceeds to the Membership Recommendation Committee and Membership Selection Committee for their assessment.
(e) Compliance Check: The Membership Selection Committee evaluates the application and forwards it to the Member Compliance Department for further scrutiny and approval.
(f) Provisional Membership Offer: Once the application is deemed satisfactory and approved, the stock broker is sent an Offer Letter of Provisional Membership.
(g) Fee Payment: The applicant is required to make the necessary payment of fees as outlined in the membership offer.
(h) Submission to SEBI: Finally, the stock broker submits the completed application along with all required documents to the SEBI for official registration. After the SEBI approves the application, a certificate of registration is issued to the applicant, allowing the broker to commence operations within the stock exchange.
This registration process ensures that stack brokers meet the necessary criteria and regulatory requirements before participating in the stock exchange activities.
10. What are the functions of Stock brokers?
Ans: The primary functions of Stock brokers are:
(a) Client Registration: Stock brakers must formalize an agreement with clients in a specified format before accepting any trading orders. This agreement outlines the terms and conditions of their working relationship.
(b) Obtaining Margin Money: In cases where the margin required for settlement exceeds Rs 50,000, brokers are responsible for collecting margin money from clients. This collected margin is typically held in the client’s bank account to facilitate the final settlement.
(c) Order Execution: One of the most critical functions of a stock broker is to execute clients’ orders accurately and efficiently. Brokers must ensure they have clear and confirmed instructions from clients before placing orders on the trading system.
(d) Providing Trade Details/necessary slip: Brokers are responsible for informing clients about their order status, including order numbers and providing copies of trade confirmation slips, modification slips, cancellation slips, etc.
(e) Issue of Contract Note: After executing a trade, brokers issue a contract note to clients. This document contains all relevant trade details and must be provided within 24 hours of trade execution.
(f) Payment and Delivery: Brokers must either make payments for the sale of securities or deliver purchased securities to clients within 24 hours of executing an order to ensure a smooth settlement process.
(g) Brokerage and Fee Collection: Brokers are entitled to charge brokerage fees, typically around 2.5%, for their services. In addition to brokerage, they may also collect other charges, which are then deposited with the relevant authorities.
(h) Bank Account Maintenance: Stock brokers are required to maintain separate bank accounts for client funds and their own operational needs. This separation ensures the safety and transparency of client funds.
(i) Receipt of Income: Brokers receive various income components such as interest, dividends, cash bonuses, coupons and rights on behalf of clients. They are responsible for transferring these funds and benefits to the respective clients in a timely manner.
Overall, stock brokers play a pivotal role in the securities market by facilitating trading operations, ensuring compliance with regulations and safeguarding the interests of both clients and the broader financial system.
11. What kind of brokers are there in the Stock Exchange?
Ans:- The following are some brokers on Stock Exchange:
(a) Bull: Bulls are brokers who are optimistic about the future performance of securities. They anticipate that security prices will rise and therefore buy securities at lower prices with the expectation of selling them at higher prices. In simple terms, a bull is a speculator who buys securities expecting higher prices in future.
(b) Bear: Bears are brokers who hold a pessimistic view of the market. They expect that security prices will decline in the future. Bear brokers aim to sell their shares quickly, often adopting a sell-first approach. In simple terms, a bear is a speculator who sells securities expecting fall in prices in near future.
(c) Stag: Stags are brokers who engage in speculative trading with the goal of making short-term gains. They are typically interested in intra-day trading, where they capitalize on short-term price movements in securities. In short, A stag is a speculator who applies for new securities in expectation that prices will rise by the time of allotment and he can sell them at premium.
(d) Jobber: A jobber also known as Tarawaniwala is a member of the stock exchange who is specialised in one type of security and buys and sells securities on his own behalf. Jobbers are independent dealers in shares who specialize in buying and quickly reselling stocks for profit. They often facilitate market liquidity by trading frequently, profiting from small price differentials.
12. What do you mean by a sub-broker? What are their job/role/functions/responsibilities? Write in brief about their registration.
Ans: A sub-broker is an intermediary who plays a role similar to that of a broker but operates between two parties: the client and the main broker. While a stock broker acts as an intermediary between an investor and the stock exchange, a sub-broker acts as an intermediary between the stock broker and the investor. The main job/role/functions/responsibilities of a sub-broker include:
(a) Mediating between Broker and Client: Sub-brokers serve as intermediaries between the broker and the client. They assist clients in various activities, Including financial transactions and paperwork related to securities trading.
(b) Client Acquisition: Sub-brokers often play a crucial role in attracting clients to the brokerage firm they are affiliated with. They may engage in marketing and promotional activities to bring in new clients.
(c) Client Assistance: Sub-brokers help clients with their investment decisions and guide them through the process of buying and selling securities. They provide valuable advice and assistance in dealing with various financial instruments.
In return for the services they provide to both the broker and the client, sub-brokers typically receive a commission based on the transactions executed by their clients. This commission serves as compensation for their role in facilitating and enhancing the client’s experience within the securities market. The registration process for a sub-broker is similar to that of a stock broker. Sub-brokers must meet the eligibility criteria, pay the necessary fees and adhere to the regulations of the stock exchange. Once they fulfill these requirements, they obtain registration with SEBI (Securities and Exchange Board of India). [NOTE: If the registrations process is asked in examinations, give answer same as registration of a broker]
Textual Questions and Answers (very short type)
1. Which of the following regulates the stock exchange in India?
(i) RBI
(ii) IRDA
(iii)SEBI
(iv) IBA
Ans: SEBI
2. True/False
1. Stock exchange is an organized market.
Ans: True
ii. Stock market transacts in commodities.
Ans: False
3. Fill in the Blank: Bulls expect a….. in price in the future.
Ans: rise
4. Write the full form of BSE.
Ans: Bombay Stock Exchange
5. Write the full form of NASDAQ.
Ans: National Association of Securities Dealers Automated Quotations
6. Write the full form of NSE.
Ans: National Stock Exchange
7. Write the full form of SEBI,
Ans: Securities and Exchange Board of India
8. Who is a jobber?
Ans: A jobber also known as Tarawaniwala is a member of the stock exchange who is specialised in one type of security and buys and sells securities on his own behalf.
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