Mutual Funds, Dividends, Stock Exchanges

Mutual Funds: Mutual funds are in the form of Trust (usually called Asset Management Company)
that manages the pool of money collected from various investors for investment in various classes of
assets to achieve certain financial goals. We can say that Mutual Fund is trusts which pool the savings
of large number of investors and then reinvests those funds for earning profits and then distribute the
dividend among the investors. In return for such services, Asset Management Companies charge small
fees. Every Mutual Fund / launches different schemes, each with a specific objective. Investors who
share the same objectives invests in that particular Scheme. Each Mutual Fund Scheme is managed by
a Fund Manager with the help of his team of professionals (One Fund Manage may be managing more
than one scheme also).
Where does Mutual Funds usually invest their funds :
The Mutual Funds usually invest their funds in equities, bonds, debentures, call money etc.,
depending on the objectives and terms of scheme floated by MF. Now a days there are MF
which even invest in gold or other asset classes.
What is NAV ? Define NAV :
NAV means Net Asset Value. The investments made by a Mutual Fund are marked to market
on daily basis. In other words, we can say that current market value of such investments is
calculated on daily basis. NAV is arrived at after deducting all liabilities (except unit capital) of
the fund from the realisable value of all assets and dividing by number of units outstanding.
Therefore, NAV on a particular day reflects the realisable value that the investor will get for
each unit if the scheme is liquidated on that date. This NAV keeps on changing with the
changes in the market rates of equity and bond markets. Therefore, the investments in Mutual
Funds is not risk free, but a good managed Fund can give you regular and higher returns than
when you can get from fixed deposits of a bank etc.
Mutual fund Definition
A mutual fund is nothing more than a collection of stocks and/or bonds. You can think of a mutual fund
as a company that brings together a group of people and invests their money in stocks, bonds, and other
securities. Each investor owns shares, which represent a portion of the holdings of the fund.

You can make money from a mutual fund in three ways:
1) Income is earned from dividends on stocks and interest on bonds. A fund pays out nearly all of the
income it receives over the year to fund owners in the form of a distribution.
2) If the fund sells securities that have increased in price, the fund has a capital gain. Most funds also
pass on these gains to investors in a distribution.
3) If fund holdings increase in price but are not sold by the fund manager, the fund's shares increase in
price. You can then sell your mutual fund shares for a profit.

Funds will also usually give you a choice either to receive a check for distributions or to reinvest the
earnings and get more shares.

Advantages of Mutual Funds
Professional Management - The primary advantage of funds is the professional management of your
money. Investors purchase funds because they do not have the time or the expertise to manage their
own portfolios. A mutual fund is a relatively inexpensive way for a small investor to get a full-time
manager to make and monitor investments. (For more reading see Active Management: Is It Working
For You?)

Diversification - By owning shares in a mutual fund instead of owning individual stocks or bonds, your
risk is spread out. The idea behind diversification is to invest in a large number of assets so that a loss in
any particular investment is minimized by gains in others. In other words, the more stocks and bonds
you own, the less any one of them can hurt you (think about Enron). Large mutual funds typically own
hundreds of different stocks in many different industries. It wouldn't be possible for an investor to build
this kind of a portfolio with a small amount of money.

Economies of Scale - Because a mutual fund buys and sells large amounts of securities at a time, its
transaction costs are lower than what an individual would pay for securities transactions.

Liquidity - Just like an individual stock, a mutual fund allows you to request that your shares be
converted into cash at any time.

Simplicity - Buying a mutual fund is easy! Pretty well any bank has its own line of mutual funds, and
the minimum investment is small. Most companies also have automatic purchase plans whereby as little
as $100 can be invested on a monthly basis.

Disadvantages of Mutual Funds
Professional Management - Many investors debate whether or not the professionals are any better
than you or I at picking stocks. Management is by no means infallible, and, even if the fund loses money,
the manager still gets paid.

Costs - Creating, distributing, and running a mutual fund is an expensive proposition. Everything from
the manager's salary to the investors' statements cost money. Those expenses are passed on to the
investors. Since fees vary widely from fund to fund, failing to pay attention to the fees can have negative
long-term consequences. Remember, every dollar spend on fees is a dollar that has no opportunity to
grow over time. (Learn how to escape these costs in Stop Paying High Mutual Fund Fees.)

Dilution - It's possible to have too much diversification. Because funds have small holdings in so many
different companies, high returns from a few investments often don't make much difference on the
overall return. Dilution is also the result of a successful fund getting too big. When money pours into
funds that have had strong success, the manager often has trouble finding a good investment for all the
new money.

Taxes - When a fund manager sells a security, a capital-gains tax is triggered. Investors who are
concerned about the impact of taxes need to keep those concerns in mind when investing in mutual
funds. Taxes can be mitigated by investing in tax-sensitive funds or by holding non-tax sensitive mutual
fund in a tax-deferred account, such as a 401(k) or IRA. (Learn about one type of tax-deferred fund in
Money Market Mutual Funds: A Better Savings Account.)
It's important to understand that each mutual fund has different risks and rewards. In general, the
higher the potential return, the higher the risk of loss. Although some funds are less risky than
others, all funds have some level of risk - it's never possible to diversify away all risk. This is a
fact for all investments.

Each fund has a predetermined investment objective that tailors the fund's assets, regions of
investments and investment strategies. At the fundamental level, there are three varieties of
mutual funds:
1) Equity funds (stocks)
2) Fixed-income funds (bonds)
3) Money market funds

All mutual funds are variations of these three asset classes. For example, while equity funds that
invest in fast-growing companies are known as growth funds, equity funds that invest only in
companies of the same sector or region are known as specialty funds.

Let's go over the many different flavors of funds. We'll start with the safest and then work
through to the more risky.

Money Market Funds
The money market consists of short-term debt instruments, mostly Treasury bills. This is a safe
place to park your money. You won't get great returns, but you won't have to worry about losing
your principal. A typical return is twice the amount you would earn in a regular checking/savings
account and a little less than the average certificate of deposit (CD).

Bond/Income Funds
Income funds are named appropriately: their purpose is to provide current income on a steady
basis. When referring to mutual funds, the terms "fixed-income," "bond," and "income" are
synonymous. These terms denote funds that invest primarily in government and corporate debt.
While fund holdings may appreciate in value, the primary objective of these funds is to provide a
steady cashflow to investors. As such, the audience for these funds consists of conservative
investors and retirees. (Learn more inIncome Funds 101.)

Bond funds are likely to pay higher returns than certificates of deposit and money market
investments, but bond funds aren't without risk. Because there are many different types of bonds,
bond funds can vary dramatically depending on where they invest. For example, a fund
specializing in high-yield junk bonds is much more risky than a fund that invests in government
securities. Furthermore, nearly all bond funds are subject to interest rate risk, which means that if
rates go up the value of the fund goes down.

Balanced Funds
The objective of these funds is to provide a balanced mixture of safety, income and capital
appreciation. The strategy of balanced funds is to invest in a combination of fixed income and
equities. A typical balanced fund might have a weighting of 60% equity and 40% fixed income.
The weighting might also be restricted to a specified maximum or minimum for each asset class.

A similar type of fund is known as an asset allocation fund. Objectives are similar to those of a
balanced fund, but these kinds of funds typically do not have to hold a specified percentage of
any asset class. The portfolio manager is therefore given freedom to switch the ratio of asset
classes as the economy moves through the business cycle.

Equity Funds
Funds that invest in stocks represent the largest category of mutual funds. Generally, the
investment objective of this class of funds is long-term capital growth with some income. There
are, however, many different types of equity funds because there are many different types of
equities. A great way to understand the universe of equity funds is to use a style box, an example
of which is below.


The idea is to classify funds based on both the size of the companies invested in and the
investment style of the manager. The term value refers to a style of investing that looks for high
quality companies that are out of favor with the market. These companies are characterized by
low P/E and price-to-book ratios and high dividend yields. The opposite of value is growth,
which refers to companies that have had (and are expected to continue to have) strong growth in
earnings, sales and cash flow. A compromise between value and growth is blend, which simply
refers to companies that are neither value nor growth stocks and are classified as being
somewhere in the middle.

For example, a mutual fund that invests in large-cap companies that are in strong financial shape
but have recently seen their share prices fall would be placed in the upper left quadrant of the
style box (large and value). The opposite of this would be a fund that invests in startup
technology companies with excellent growth prospects. Such a mutual fund would reside in the
bottom right quadrant (small and growth). (For further reading, check out Understanding The
Mutual Fund Style Box.)

Global/International Funds
An international fund (or foreign fund) invests only outside your home country. Global funds
invest anywhere around the world, including your home country.

It's tough to classify these funds as either riskier or safer than domestic investments. They do
tend to be more volatile and have unique country and/or political risks. But, on the flip side, they
can, as part of a well-balanced portfolio, actually reduce risk by increasing diversification.
Although the world's economies are becoming more inter-related, it is likely that another
economy somewhere is outperforming the economy of your home country.

Specialty Funds
This classification of mutual funds is more of an all-encompassing category that consists of
funds that have proved to be popular but don't necessarily belong to the categories we've
described so far. This type of mutual fund forgoes broad diversification to concentrate on a
certain segment of the economy.

Sector funds are targeted at specific sectors of the economy such as financial, technology, health,
etc. Sector funds are extremely volatile. There is a greater possibility of big gains, but you have
to accept that your sector may tank.

Regional funds make it easier to focus on a specific area of the world. This may mean focusing
on a region (say Latin America) or an individual country (for example, only Brazil). An
advantage of these funds is that they make it easier to buy stock in foreign countries, which is
otherwise difficult and expensive. Just like for sector funds, you have to accept the high risk of
loss, which occurs if the region goes into a bad recession.

Socially-responsible funds (or ethical funds) invest only in companies that meet the criteria of
certain guidelines or beliefs. Most socially responsible funds don't invest in industries such as
tobacco, alcoholic beverages, weapons or nuclear power. The idea is to get a competitive
performance while still maintaining a healthy conscience.

Index Funds
The last but certainly not the least important are index funds. This type of mutual fund replicates
the performance of a broad market index such as the S&P 500 or Dow Jones Industrial Average
(DJIA). An investor in an index fund figures that most managers can't beat the market. An index
fund merely replicates the market return and benefits investors in the form of low fees. (For more
on index funds, check out our Index Investing Tutorial.)
Mutual fund data is easy to find and easy to read. The most common method of accessing the
information used to be via a mutual fund table in the newspaper, but now this information is more
commonly found online. (For more on finding the right information, check out Data Mining For
Investors.)

Online
Websites provide significantly more data about a given mutual fund than a fund table does. Yahoo
Finance, MSN Money and all of the major mutual fund companies provide robust websites filled with
fund information.

The following basic details are usually provided: fund name, net asset value, trade time (provides date
for last price), price change, previous close price, year-to-date return, net assets, and yield. With a just a
few clicks of the mouse you can also view historical prices, headlines news, fund holdings, Morningstar
ratings and more. (Learn how to use this data in Analyzing Mutual Funds For Maximum Return.)

Newspaper Fund Table
By providing key data points, mutual fund tables give an overview of a mutual fund's performance for
the past 12 months in relation to its current price. They also provide insight into how the fund's price
per share has changed over the course of the most recent week.

However, with the high prices of newsprint, declining readership, and increasing adoption of technology,
many newspapers are cutting back on the space allocated to mutual fund tables. This is particularly true
where smaller and less popular funds are concerned. Going online or calling the fund company directly
may be the only way to get information about these products.

What Do You Need?
The wealth of information available can be daunting. What do you really need to know? Where can you
go to find it? How much detail is too much? The answers to these questions largely depend on how you
plan to invest. If you are looking to day trade, for example, information about daily pricing trends may
be critical to your efforts. If you plan to buy and hold for decades, long-term performance information,
fund expense ratios, and the management team's history are probably enough. Fund fact sheets and a
copy of the fund's prospectus are available on most fund company websites. These documents generally
provide all the information long-term investors require to make decisions. (To learn more, check out
January: Time To Read Your Mutual Fund's Annual Report.)
Perhaps you've noticed all those mutual fund ads that quote their amazingly high one-year rates
of return. Your first thought is "wow, that mutual fund did great!" Well, yes it did great last year,
but then you look at the three-year performance, which is lower, and the five year, which is yet
even lower. What's the underlying story here? Let's look at a real example from a large mutual
fund's performance:
1 year 3 year 5 year
53% 20% 11%

Last year, the fund had excellent performance at 53%. But, in the past three years, the average
annual return was 20%. What did it do in years 1 and 2 to bring the average return down to 20%?
Some simple math shows us that the fund made an average return of 3.5% over those first two
years: 20% = (53% + 3.5% + 3.5%)/3. Because that is only an average, it is very possible that the
fund lost money in one of those years.

It gets worse when we look at the five-year performance. We know that in the last year the fund
returned 53% and in years 2 and 3 we are guessing it returned around 3.5%. So what happened in
years 4 and 5 to bring the average return down to 11%? Again, by doing some simple
calculations we find that the fund must have lost money, an average of -2.5% each year of those
two years: 11% = (53% + 3.5% + 3.5% - 2.5% - 2.5%)/5. Now the fund's performance doesn't
look so good!

It should be mentioned that, for the sake of simplicity, this example, besides making some big
assumptions, doesn't include calculating compound interest. Still, the point wasn't to be
technically accurate but to demonstrate the importance of taking a closer look at performance
numbers. A fund that loses money for a few years can bump the average up significantly with
one or two strong years.

It's All Relative
Of course, knowing how a fund performed is only one third of the battle. Performance is a
relative issue, literally. If the fund we looked at above is judged against its appropriate
benchmark index, a whole new layer of information is added to the evaluation. If the index
returned 75% for the 1 year time period, that 53% from the fund doesn't look quite so good. On
the other hand, if the index delivered results of 25%, 5%, and -5% for the respective one, three,
and five-year periods, then the fund's results look rather fine indeed.

To add another layer of information to the evaluation, one can consider a fund's performance
against its peer group as well as against its index. If other funds that invest with a similar
mandate had similar performance, this data point tells us that the fund is in line with its peers. If
the fund bested its peers and its benchmark, its results would be quite impressive indeed.

Looking at any one piece of information in isolation only tells a small portion of the story.
Consider the comparison of a fund against its peers. If the fund sits in the top slot over each of
the comparison periods, it is likely to be a solid performer. If it sits at the bottom, it may be even
worse than perceived, as peer group comparisons only capture the results from existing funds.
Many fund companies are in the habit of closing their worst performers. When the "losers" are
purged from their respective categories, their statistical records are no longer included in the
category performance data. This makes the category averages creep higher than they would have
if the losers were still in the mix. This is better known as survivorship bias. (Learn more about
survivorship bias in The Truth Behind Mutual Fund Returns.)

To develop the best possible picture of fund's performance results, consider as many data points
as you can. Long-term investors should focus on long-term results, keeping in mind that even the
best performing funds have bad years from time to time. (Dig into the numbers in Mutual Fund
Ratings: Are They Decieving?)

Conclution:
A mutual fund brings together a group of people and invests their money in stocks,
bonds, and other securities.
The advantages of mutuals are professional management, diversification, economies of
scale, simplicity and liquidity.
The disadvantages of mutuals are high costs, over-diversification, possible tax
consequences, and the inability of management to guarantee a superior return.
There are many, many types of mutual funds. You can classify funds based on asset class,
investing strategy, region, etc.
Mutual funds have lots of costs.
Costs can be broken down into ongoing fees (represented by the expense ratio) and
transaction fees (loads).
The biggest problems with mutual funds are their costs and fees.
Mutual funds are easy to buy and sell. You can either buy them directly from the fund
company or through a third party.
Mutual fund ads can be very deceiving.
Dividends
A dividend is a payment made by a corporation to its shareholders, usually as a distribution of
profits.
[1]
When a corporation earns a profit or surplus, it can either re-invest it in the business
(called retained earnings), or it can distribute it to shareholders. A corporation may retain a
portion of its earnings and pay the remainder as a dividend. Distribution to shareholders can be
in cash (usually a deposit into a bank account) or, if the corporation has a dividend reinvestment
plan, the amount can be paid by the issue of further shares or share repurchase.
[2][3]

A dividend is allocated as a fixed amount per share, with shareholders receiving a dividend in
proportion to their shareholding. For the joint stock company, paying dividends is not an
expense; rather, it is the division of after tax profits among shareholders. Retained earnings
(profits that have not been distributed as dividends) are shown in the shareholder equity section
in the company's balance sheet - the same as its issued share capital. Public companies usually
pay dividends on a fixed schedule, but may declare a dividend at any time, sometimes called a
special dividend to distinguish it from the fixed schedule dividends. Cooperatives, on the other
hand, allocate dividends according to members' activity, so their dividends are often considered
to be a pre-tax expense.
The word "dividend" comes from the Latin word "dividendum" ("thing to be divided").
[4]

Contents
1 Forms of payment
2 Reliability of dividends
3 Dividend dates
4 Dividend-reinvestment
5 Dividend taxation
o 5.1 Australia and New Zealand
o 5.2 UK
o 5.3 India
o 5.4 Effect on stock price
o 5.5 Criticism
6 Other corporate entities
o 6.1 Cooperatives
o 6.2 Trusts
o 6.3 Mutuals
7 See also
8 References
9 External links
Forms of payment
Cash dividends are the most common form of payment and are paid out in currency, usually via
electronic funds transfer or a printed paper check. Such dividends are a form of investment
income and are usually taxable to the recipient in the year they are paid. This is the most
common method of sharing corporate profits with the shareholders of the company. For each
share owned, a declared amount of money is distributed. Thus, if a person owns 100 shares and
the cash dividend is GBP 0.50 per share, the holder of the stock will be paid GBP 50.
Dividends paid are not classified as an expense, but rather a deduction of retained earnings.
Dividends paid does not show up on an Income Statement but does appear on the Balance Sheet.
Stock or scrip dividends are those paid out in the form of additional stock shares of the issuing
corporation, or another corporation (such as its subsidiary corporation). They are usually issued
in proportion to shares owned (for example, for every 100 shares of stock owned, a 5% stock
dividend will yield 5 extra shares).
Nothing tangible will be gained if the stock is split because the total number of shares increases,
lowering the price of each share, without changing the market capitalization, or total value, of the
shares held. (See also Stock dilution.)
Stock dividend distributions are issues of new shares made to limited partners by a partnership
in the form of additional shares. Nothing is split, these shares increase the market capitalization
and total value of the company at the same time reducing the original cost basis per share.
Stock dividends are not includable in the gross income of the shareholder for US income tax
purposes. Because the shares are issued for proceeds equal to the pre-existing market price of the
shares; there is no negative dilution in the amount recoverable.
[5][6][7]

Property dividends or dividends in specie(Latin for "in kind") are those paid out in the form of
assets from the issuing corporation or another corporation, such as a subsidiary corporation.
They are relatively rare and most frequently are securities of other companies owned by the
issuer, however they can take other forms, such as products and services.
Interim dividends are dividend payments made before a company's Annual General Meeting
(AGM) and final financial statements. This declared dividend usually accompanies the
company's interim financial statements.
Other dividends can be used in structured finance. Financial assets with a known market value
can be distributed as dividends; warrants are sometimes distributed in this way. For large
companies with subsidiaries, dividends can take the form of shares in a subsidiary company. A
common technique for "spinning off" a company from its parent is to distribute shares in the new
company to the old company's shareholders. The new shares can then be traded independently.
Reliability of dividends
Two metrics are commonly used to examine a firm's dividend policy.
Payout ratio is calculated by dividing the company's dividend by the earnings per share. A
payout ratio greater than 1 means the company is paying out more in dividends for the year than
it earned.
Dividend cover is calculated by dividing the company's cash flow from operations by the
dividend. This ratio is apparently popular with analysts of income trusts in Canada.
[citation needed]

Dividends are payments made by a corporation to its shareholder members. It is the portion of
corporate profits paid out to stockholders.
Dividend dates
Any dividend that is declared must be approved by a company's Board of Directors before it is
paid. For public companies, there are four important dates to remember regarding dividends.
These are discussed in detail with examples at the Securities and Exchange Commission site [4]
Declaration date is the day the Board of Directors announces its intention to pay a dividend. On
this day, a liability is created and the company records that liability on its books; it now owes the
money to the stockholders. On the declaration date, the Board will also announce a date of record
and a payment date.
In-dividend date is the last day, which is one trading day before the ex-dividend date, where the
stock is said to be cum dividend ('with [including] dividend'). In other words, existing holders of
the stock and anyone who buys it on this day will receive the dividend, whereas any holders
selling the stock lose their right to the dividend. After this date the stock becomes ex dividend.
Ex-dividend date (typically 2 trading days before the record date for U.S. securities) is the day
on which all shares bought and sold no longer come attached with the right to be paid the most
recently declared dividend. This is an important date for any company that has many
stockholders, including those that trade on exchanges, as it makes reconciliation of who is to be
paid the dividend easier. Existing holders of the stock will receive the dividend even if they now
sell the stock, whereas anyone who now buys the stock will not receive the dividend. It is
relatively common for a stock's price to decrease on the ex-dividend date by an amount roughly
equal to the dividend paid. This reflects the decrease in the company's assets resulting from the
declaration of the dividend. The company does not take any explicit action to adjust its stock
price; in an efficient market, buyers and sellers will automatically price this in.
Book closure Date Whenever a company announces a dividend pay-out, it also announces a date
on which the company will ideally temporarily close its books for fresh transfers of stock.
Record date Shareholders registered in the stockholders of record on or before the date of
record will receive the dividend. Shareholders who are not registered as of this date will not
receive the dividend. Registration in most countries is essentially automatic for shares purchased
before the ex-dividend date.
Payment date is the day when the dividend cheques will actually be mailed to the shareholders
of a company or credited to brokerage accounts.
Dividend-reinvestment
Some companies have dividend reinvestment plans, or DRIPs, not to be confused with scrips.
DRIPs allow shareholders to use dividends to systematically buy small amounts of stock, usually
with no commission and sometimes at a slight discount. In some cases, the shareholder might not
need to pay taxes on these re-invested dividends, but in most cases they do.
Dividend taxation
In many countries, such as the U.S.A. and Canada, income from dividends is taxed, albeit at a
lower rate than ordinary income. Though in most cases, the lower tax rate is due to profits being
taxed initially as Corporate tax.
Australia and New Zealand
In Australia and New Zealand, companies also forward franking credits or imputation credits to
shareholders along with dividends. These franking credits represent the tax paid by the company
upon its pre-tax profits. One dollar of company tax paid generates one franking credit.
Companies can forward any proportion of franking up to a maximum amount that is calculated
from the prevailing company tax rate: for each dollar of dividend paid, the maximum level of
franking is the company tax rate divided by (1 - company tax rate). At the current 30% rate, this
works out at 0.30 of a credit per 70 cents of dividend, or 42.857 cents per dollar of dividend. The
shareholders who are able to use them offset these credits against their income tax bills at a rate
of a dollar per credit, thereby effectively eliminating the double taxation of company profits.
This system is called dividend imputation.
UK
The UK's taxation system operates along similar lines to Australia and New Zealand: when a
shareholder receives a dividend, the basic rate of income tax is deemed to already have been paid
on that dividend. This ensures that double taxation does not take place, however this creates
difficulties for some non-taxpaying entities such as certain trusts, charities and pension funds
which are not allowed to reclaim the deemed tax payment and thus are in effect taxed on their
income.
India
In India, companies declaring or distributing dividend, are required to pay a Corporate Dividend
Tax in addition to the tax levied on their income. Dividend received is exempt in the hands of the
shareholder's, in respect of which Corporate Dividend Tax has been paid by the company.
Effect on stock price
After a stock goes ex-dividend (i.e.. the financial obligation for the company to pay the dividend
to the holder), the stock price should drop.
To calculate the amount of the drop, the traditional method is to view the financial effects of the
dividend from the perspective of the company. Since the company has paid say x in dividends
per share out of its cash account on the left hand side of the balance sheet, the equity account on
the right side should decrease an equivalent amount. This means that a x dividend should result
in a x drop in the share price.
A more accurate method of calculating this price is to look at the share price and dividend from
the after-tax perspective of a share holder. The after-tax drop in the share price (or capital
gain/loss) should be equivalent to the after-tax dividend. For example, if the tax of capital gains
Tcg is 35%, and the tax on dividends Td is 15%, then a 1 dividend is equivalent to 0.85 of
after tax money. To get the same financial benefit from a capital loss, the after tax capital loss
value should equal 0.85. The pre-tax capital loss would be 0.85/(1-Tcg) = 0.85/(1-35%) =
0.85/65% = 1.30. In this case, a dividend of 1 has led to a larger drop in the share price of
1.30, because the tax rate on capital losses is higher than the dividend tax rate.
Finally, security analysis that does not take dividends into account may mute the decline in share
price, for example in the case of a Priceearnings ratio target that does not back out cash; or
amplify the decline, for example in the case of Trend following.
Criticism
Some believe that company profits are best re-invested back into the company: research and
development, capital investment, expansion, etc. Proponents of this view (and thus critics of
dividends per se) suggest that an eagerness to return profits to shareholders may indicate the
management having run out of good ideas for the future of the company. Some studies, however,
have demonstrated that companies that pay dividends have higher earnings growth, suggesting
that dividend payments may be evidence of confidence in earnings growth and sufficient
profitability to fund future expansion.
[8]

Taxation of dividends is often used as justification for retaining earnings, or for performing a
stock buyback, in which the company buys back stock, thereby increasing the value of the stock
left outstanding.
When dividends are paid, individual shareholders in many countries suffer from double taxation
of those dividends:
1. the company pays income tax to the government when it earns any income, and then
2. when the dividend is paid, the individual shareholder pays income tax on the dividend
payment.
In many countries, the tax rate on dividend income is lower than for other forms of income to
compensate for tax paid at the corporate level.
Capital gains should not be confused with dividends. Capital gains assume an increase in a
stock's value. Dividend is merely parsing out a share of the profits, and is taxed at the dividend
tax rate. If there is an increase of value of stock, and a shareholder chooses to sell the stock, the
shareholder will pay a tax on capital gains (often taxed at a lower rate than ordinary income). If a
holder of the stock chooses to not participate in the buyback, the price of the holder's shares
could rise (as well as it could fall), but the tax on these gains is delayed until the actual sale of
the shares.
Certain types of specialized investment companies (such as a REIT in the U.S.) allow the
shareholder to partially or fully avoid double taxation of dividends.
Shareholders in companies that pay little or no cash dividends can reap the benefit of the
company's profits when they sell their shareholding, or when a company is wound down and all
assets liquidated and distributed amongst shareholders. This, in effect, delegates the dividend
policy from the board to the individual shareholder. Payment of a dividend can increase the
borrowing requirement, or leverage, of a company.
Other corporate entities
Cooperatives
Cooperative businesses may retain their earnings, or distribute part or all of them as dividends to
their members. They distribute their dividends in proportion to their members' activity, instead of
the value of members' shareholding. Therefore, co-op dividends are often treated as pre-tax
expenses. In other words, local tax or accounting rules may treat a dividend as a form of
customer rebate or a staff bonus to be deducted from turnover before profit (tax profit or
operating profit) is calculated.
Consumers' cooperatives allocate dividends according to their members' trade with the co-op.
For example, a credit union will pay a dividend to represent interest on a saver's deposit. A retail
co-op store chain may return a percentage of a member's purchases from the co-op, in the form
of cash, store credit, or equity. This type of dividend is sometimes known as a patronage
dividend or patronage refund, as well as being informally named divi or divvy.
[9][10][11]

Producer cooperatives, such as worker cooperatives, allocate dividends according to their
members' contribution, such as the hours they worked or their salary.
[12]

Trusts
In real estate investment trusts and royalty trusts, the distributions paid often will be consistently
greater than the company earnings. This can be sustainable because the accounting earnings do
not recognize any increasing value of real estate holdings and resource reserves. If there is no
economic increase in the value of the company's assets then the excess distribution (or dividend)
will be a return of capital and the book value of the company will have shrunk by an equal
amount. This may result in capital gains which may be taxed differently than dividends
representing distribution of earnings.
Mutuals
The distribution of profits by other forms of mutual organization also varies from that of joint
stock companies, though may not take the form of a dividend.
In the case of mutual insurance, for example, in the United States, a distribution of profits to
holders of participating life policies is called a dividend. These profits are generated by the
investment returns of the insurer's general account, in which premiums are invested and from
which claims are paid.
[13]
The participating dividend may be used to decrease premiums, or to
increase the cash value of the policy.
[14]
Some life policies pay nonparticipating dividends. As a
contrasting example, in the United Kingdom, the surrender value of a with-profits policy is
increased by a bonus, which also serves the purpose of distributing profits. Life insurance
dividends and bonuses, while typical of mutual insurance, are also paid by some joint stock
insurers.
Insurance dividend payments are not restricted to life policies. For example, general insurer State
Farm Mutual Automobile Insurance Company can distribute dividends to its vehicle insurance
policyholders.
[15]

What is SEBI?

Securities and Exchange Board of India (SEBI) is an apex body for overall development and
regulation of the securities market. It was set up on April 12, 1988. To start with, SEBI was set
up as a non-statutory body. Later on it became a statutory body under the Securities Exchange
Board of India Act, 1992. The Act entrusted SEBI with comprehensive powers over practically
all the aspects of capital market operations.

Picture of SEBI Bhavan in Mumbai. Image Credits Paul Noronha.

Role Functions of SEBI

The role or functions of SEBI are discussed below.
1. To protect the interests of investors through proper education and guidance as regards
their investment in securities. For this, SEBI has made rules and regulation to be followed
by the financial intermediaries such as brokers, etc. SEBI looks after the complaints
received from investors for fair settlement. It also issues booklets for the guidance and
protection of small investors.
2. To regulate and control the business on stock exchanges and other security markets. For
this, SEBI keeps supervision on brokers. Registration of brokers and sub-brokers is made
compulsory and they are expected to follow certain rules and regulations. Effective
control is also maintained by SEBI on the working of stock exchanges.
3. To make registration and to regulate the functioning of intermediaries such as stock
brokers, sub-brokers, share transfer agents, merchant bankers and other intermediaries
operating on the securities market. In addition, to provide suitable training to
intermediaries. This function is useful for healthy atmosphere on the stock exchange and
for the protection of small investors.
4. To register and regulate the working of mutual funds including UTI (Unit Trust of India).
SEBI has made rules and regulations to be followed by mutual funds. The purpose is to
maintain effective supervision on their operations & avoid their unfair and anti-investor
activities.
5. To promote self-regulatory organization of intermediaries. SEBI is given wide statutory
powers. However, self-regulation is better than external regulation. Here, the function of
SEBI is to encourage intermediaries to form their professional associations and control
undesirable activities of their members. SEBI can also use its powers when required for
protection of small investors.
6. To regulate mergers, takeovers and acquisitions of companies in order to protect the
interest of investors. For this, SEBI has issued suitable guidelines so that such mergers
and takeovers will not be at the cost of small investors.
7. To prohibit fraudulent and unfair practices of intermediaries operating on securities
markets. SEBI is not for interfering in the normal working of these intermediaries. Its
function is to regulate and control their objectional practices which may harm the
investors and healthy growth of capital market.
8. To issue guidelines to companies regarding capital issues. Separate guidelines are
prepared for first public issue of new companies, for public issue by existing listed
companies and for first public issue by existing private companies. SEBI is expected to
conduct research and publish information useful to all market players (i.e. all buyers and
sellers).
9. To conduct inspection, inquiries & audits of stock exchanges, intermediaries and self-
regulating organizations and to take suitable remedial measures wherever necessary. This
function is undertaken for orderly working of stock exchanges & intermediaries.
10. To restrict insider trading activity through suitable measures. This function is useful for
avoiding undesirable activities of brokers and securities scams.
Stock Exchange
What is Stock Exchange? Meaning
Stock Exchange (also called Stock Market or Share Market) is one important constituent of
capital market. Stock Exchange is an organized market for the purchase and sale of industrial and
financial security. It is convenient place where trading in securities is conducted in systematic
manner i.e. as per certain rules and regulations.
It performs various functions and offers useful services to investors and borrowing companies. It
is an investment intermediary and facilitates economic and industrial development of a country.
Stock exchange is an organized market for buying and selling corporate and other securities.
Here, securities are purchased and sold out as per certain well-defined rules and regulations. It
provides a convenient and secured mechanism or platform for transactions in different securities.
Such securities include shares and debentures issued by public companies which are duly listed
at the stock exchange, and bonds and debentures issued by government, public corporations and
municipal and port trust bodies.
Stock exchanges are indispensable for the smooth and orderly functioning of corporate sector in
a free market economy. A stock exchange need not be treated as a place for speculation or a
gambling den. It should act as a place for safe and profitable investment, for this, effective
control on the working of stock exchange is necessary. This will avoid misuse of this platform
for excessive speculation, scams and other undesirable and anti-social activities.
London stock exchange (LSE) is the oldest stock exchange in the world. While Bombay stock
exchange (BSE) is the oldest in India. Similar Stock exchanges exist and operate in large
majority of countries of the world
Definitions of Stock Exchange
"Stock exchanges are privately organized markets which are used to facilitate trading in
securities."
The Indian Securities Contracts (Regulation) Act of 1956, defines Stock Exchange as,
"An association, organization or body of individuals, whether incorporated or not, established for
the purpose of assisting, regulating and controlling business in buying, selling and dealing in
securities."
Features of Stock Exchange
Characteristics or features of stock exchange are:-
1. Market for securities : Stock exchange is a market, where securities of corporate bodies,
government and semi-government bodies are bought and sold.
2. Deals in second hand securities : It deals with shares, debentures bonds and such
securities already issued by the companies. In short it deals with existing or second hand
securities and hence it is called secondary market.
3. Regulates trade in securities : Stock exchange does not buy or sell any securities on its
own account. It merely provides the necessary infrastructure and facilities for trade in
securities to its members and brokers who trade in securities. It regulates the trade
activities so as to ensure free and fair trade
4. Allows dealings only in listed securities : In fact, stock exchanges maintain an official
list of securities that could be purchased and sold on its floor. Securities which do not
figure in the official list of stock exchange are called unlisted securities. Such unlisted
securities cannot be traded in the stock exchange.
5. Transactions effected only through members : All the transactions in securities at the
stock exchange are effected only through its authorised brokers and members. Outsiders
or direct investors are not allowed to enter in the trading circles of the stock exchange.
Investors have to buy or sell the securities at the stock exchange through the authorised
brokers only.
6. Association of persons : A stock exchange is an association of persons or body of
individuals which may be registered or unregistered.
7. Recognition from Central Government : Stock exchange is an organised market. It
requires recognition from the Central Government.
8. Working as per rules : Buying and selling transactions in securities at the stock
exchange are governed by the rules and regulations of stock exchange as well as SEBI
Guidelines. No deviation from the rules and guidelines is allowed in any case.
9. Specific location : Stock exchange is a particular market place where authorised brokers
come together daily (i.e. on working days) on the floor of market called trading circles
and conduct trading activities. The prices of different securities traded are shown on
electronic boards. After the working hours market is closed. All the working of stock
exchanges is conducted and controlled through computers and electronic system.
10. Financial Barometers : Stock exchanges are the financial barometers and development
indicators of national economy of the country. Industrial growth and stability is reflected
in the index of stock exchange.
Articles on Stock Exchange
Read more related articles on stock exchange:-
1. Functions of stock exchange.
2. 1. Continuous and ready market for securities
3.
4. Stock exchange provides a ready and continuous market for purchase and sale of
securities. It provides ready outlet for buying and selling of securities. Stock exchange
also acts as an outlet/counter for the sale of listed securities.
5.
6.
7.
8. 2. Facilitates evaluation of securities
9.
10. Stock exchange is useful for the evaluation of industrial securities. This enables investors
to know the true worth of their holdings at any time. Comparison of companies in the
same industry is possible through stock exchange quotations (i.e price list).
11.
12. 3. Encourages capital formation
13.
14. Stock exchange accelerates the process of capital formation. It creates the habit of saving,
investing and risk taking among the investing class and converts their savings into
profitable investment. It acts as an instrument of capital formation. In addition, it also
acts as a channel for right (safe and profitable) investment.
15.
16. 4. Provides safety and security in dealings
17.
18. Stock exchange provides safety, security and equity (justice) in dealings as transactions
are conducted as per well defined rules and regulations. The managing body of the
exchange keeps control on the members. Fraudulent practices are also checked
effectively. Due to various rules and regulations, stock exchange functions as the
custodian of funds of genuine investors.
19.
20. 5. Regulates company management
21.
22. Listed companies have to comply with rules and regulations of concerned stock exchange
and work under the vigilance (i.e supervision) of stock exchange authorities.
23.
24. 6. Facilitates public borrowing
25.
26. Stock exchange serves as a platform for marketing Government securities. It enables
government to raise public debt easily and quickly.
27.
28. 7. Provides clearing house facility
29.
30. Stock exchange provides a clearing house facility to members. It settles the transactions
among the members quickly and with ease. The members have to pay or receive only the
net dues (balance amounts) because of the clearing house facility.
31.
32. 8. Facilitates healthy speculation
33.
34. Healthy speculation, keeps the exchange active. Normal speculation is not dangerous but
provides more business to the exchange. However, excessive speculation is undesirable
as it is dangerous to investors & the growth of corporate sector.
35.
36. 9. Serves as Economic Barometer
37.
38. Stock exchange indicates the state of health of companies and the national economy. It
acts as a barometer of the economic situation / conditions.
39.
40. 10. Facilitates Bank Lending
41.
42. Banks easily know the prices of quoted securities. They offer loans to customers against
corporate securities. This gives convenience to the owners of securities.


Services given by Stock Exchange to Investors


Image Credits A7design1
1. Provides liquidity to investement : Stock exchange provides liquidity (i.e easy
convertibility to cash) to investment in securities. An investor can sell his securities at
any time because of the ready market provided by the stock exchange. Stock exchange
provides easy marketability to corporate securities.
2. Provides collateral value to securities : Stock exchange provides better value to
securities as collateral for a loan. This facilitates borrowing from a bank against securities
on easy terms.
3. Offers opportunity to participate in the industrial growth : Stock exchange provides
capital for industrial growth. It enables an investor to participate in the industrial
development of the country.
4. Estimates the worth of securities : Stock exchange provides the facility of knowing the
worth (i.e true market value) of investment due to quotations (i.e price list) and reports
published regularly by the exchange. This type of information guides investors as regards
their future investments. They can purchase or sell securities as per the price trends (i.e
latest price value) in the market.
5. Offers safety in corporate investment : An investor can invest his surplus money (i.e
extra money) in the listed securities with reasonable safety. The risk in such investment is
reduced considerably due to the supervision of stock exchange authorities on listed
companies. Moreover, securities are listed only when the exchange authorities are
satisfied as regards legality and solvency of company concerned. Such scrutiny (detailed
checking) avoids listing, of securities of unsound companies (i.e companies with bad
financial status).

Services given by Stock Exchange to Companies

1. Widens market for securities : Stock exchange widens the market for the listed
securities and enables the companies to collect capital for promotion, expansion and
modernization purpose. It indirectly provides financial support to companies /
corporations.
2. Creates goodwill and reputation : Stock exchange enhances the goodwill and the
reputation of the companies whose securities are listed. Listing acts as a charater
certificate given to a company. It gives prestigious position to company.
3. Facilitates fair pricing of listed securities : The market price of listed securities tends to
be slightly higher in relation to earnings and property values.
4. Provides better response from investors : Listed securities get better response from the
investor due to safety and security. Listing of securities is a unique service which stock
exchanges offer to companies. It is a moral support given to stable companies.
5. Facilitates quick selling of securities : Stock exchange enables companies to sell their
securities easily and quickly. This is natural as investors always prefer to invest money in
listed securities.
Service given by Stock Exchange to Economy
Brings economic development : Stock exchanges brings rapid economic development
through mobilization of funds for productive purposes. This facilitates the process of
economic growth.
List of Terms relating to Indian Stock Exchange

List of the important terms relating to indian stock exchange transactions.

1. Group A Shares

These are the listed equity shares of large and well established companies having broad
investor base. These shares are actively traded and for these shares the facility for
carrying forward a transaction from one accounting period to another is available.
Naturally, these shares attract a lot of speculative multiples. These facilities are not
available for group B shares. However, shares can be moved from Group B to Group A
and vice versa depending on criteria for shifting. For instance the Bombay Stock
Exchange has laid down several criteria for shifting shares from Group B to Group A;
such as, an equity base of Rs. 10 crores, a market capitalization of Rs. 25-30 crores, a
public holding of 35 to 40 percent, a shareholding population of 15,000 to 20,000, good
dividend paying status, etc.
2. Group B Shares

These are those listed shares which do not follow the criteria prescribed for Group A
shares. Group B shares are again divided into B1 and B shares on BSE. B1 shares
represent well traded scrips among B group and they have weekly settlements.

3. Group C Shares

Under Group C, only odd lots and permitted securities are included. A number of shares
that are less than the market lot are called odd lots. Market lot refers to the minimum
number of shares of a particular security that must be transacted on a stock exchange.
Odd lots have settlement once in a fortnights or once on Saturdays. Permitted securities
are those that are not listed on a stock exchange but are listed on other exchanges in
India. So they are permitted to be traded on BSE. Odd lots cannot be easily transacted on
the stock exchange and so they are illiquid in nature.

4. Arbitration
Arbitration is a quasi-judicial process to resolve a dispute which is faster and
inexpensive. The stock exchange facilitates the process of arbitration between the
member and their clients. The disputes between the parties are resolved through
arbitration in accordance with the by-laws of the exchange. Arbitration is required in the
matters such as settlement of claims, differences and disputes between one member and
another, between a member and his clients, sub-brokers or authorised clerks etc.

5. Arbitrage

Arbitrage is undertaken to make a profit out of differences in prices of a security in two
different markets. It is a highly skilled speculative activity. If the prices of a security
differ substantially in the two stock markets, the speculator purchases the security in the
market where it is cheap and sells it at a profit in another market where it is quoted high
and thus makes huge profit. The speculator has to act very fast since the prices are highly
sensitive and they may get equalised within a short span of time.
The arbitrage may be carried on between the two markets within the country or in two
different countries. The former is called 'domestic arbitrage' and the latter 'foreign
arbitrage'. Arbitrage ultimately helps in equalising the prices of securities at different
places; hence, it is beneficial to market. The brokers who carry arbitrage activity are
called arbitragers.

6. Auction

An auction is a mechanism utilised by the exchange to fulfil its obligation to a counter
party member when a member fails to deliver good securities or make the payment. The
stock exchange, in such cases, arranges to buy good securities through auction and
deliver them to the buying broker or arranges to realise the cash and pay it to the selling
broker.

7. At Best Order

1. It is an order from an investor for the purchase or sale of securities wherein the investor
does not specify a price at which the purchase or sale of securities should be made by
broker on his behalf. Such order must be executed by the broker at best possible price.
The client may also fix a time frame within which the order has to be executed. e. g. "Buy
200 Reliance Industries at best".
2.
3. 8. Authorised Clerk
4.
5. An authorised clerk is a representative appointed by a stock broker to assist him in the
securities trading. A broker cannot remain present all the time on trading floor of stock
exchange, hence he requires assistants to carry out trading activities on his behalf. As per
the rules of the stock exchange, each broker can employ a specified number of authorised
clerks to transact his business. They are also called 'member assistants'. At Bombay,
Madras & Calcutta Stock exchanges the number of authorised clerks allowed by a broker
are 5, 3 and 8 respectively. Generally, authorised clerks are given power of attorney to act
on behalf of broker & hence they can sign on behalf of brokers.
6.
7. 9. Bad Delivery Cell
8.
9. A delivery of shares turns out to be bad if there is a company objection on account of
signature difference, or if shares are fake, forged or stolen etc. In such a case the investor
can approach the bad delivery cell of stock exchange through his broker for correction or
replacement with good delivery.
10.
11. 10. Bid and Offer
12.
13. Bid refers to the price of a share which a prospective buyer is ready to pay for particular
scrip. Offer is the price at which a share is offered for a sale on stock exchange.
14.
15. 11. Brokerage
16.
17. Brokerage means the commission charged by a broker for purchase or sale of securities
done through him. The maximum brokerage chargeable as stipulated by SEBI is at
present 2.5 % of the trade value.
18.
19. 12. BOLT
20.
21. Bombay Stock Exchange has introduced BOLT. That is, BSE - On - Line - Trading -
System for listed securities. Trading is order driven as quote driver system is
discontinued. For this purpose BSE classified the listed securities into 5 categories. Viz.
A, B1, B2, F, G and Z. Out of these A, B1 and B2 groups represent equity segment.
Group F represents securities which have fixed income, 'G' group represents Government
Securities whereas 'Z' represents those companies which failed to comply with listing
norms or failed to redress investors' complaints or failed to comply with depository
requirements. Trading of securities of listed companies of other exchanges is also
permitted and these securities are categorised in 'Permitted Securities.'
22.
23. 13. 'Badla' or Carry Forward Trading
24.
25. Carry Forward or 'Badla' refers to the trading in which the settlement of a transaction is
postponed to the next settlement period on payment of some charges by way of interest
known as Badla Charges. Carryover or Badla is a facility given to the speculator by the
other party to carry forward the transaction from one settlement period to another. The
scrips in specified categories (i.e. Group A) alone could be carried forward. Badla
charges vary from period to period and are fixed fortnightly.
26.
27. 14. Bulls
28.
29. Bulls are those brokers of stock exchange who are very optimistic of the rise in prices of
securities. Hence, they go on buying shares in expectation of selling them at higher prices
later. Thus, in a bull market there will be excess of purchase over sales. Bulls are also
called 'Tejiwallas'.
30.
31. 15. Bears
32.
33. Bears are those member brokers of stock exchange who are always pessimistic in
approach. They expect a fall in prices of securities. Hence, they go on selling securities.
They are also called Mandiwallas. A Bearish market refers to a market where prices of
shares are falling continuously where there are excess of sales over purchases.
34.
35. 16. Blank transfers
36.
37. Blank transfers facilitate speculative activities through badla transactions. If a seller (or
transferer) of security simply signs the transfer form without specifying the name of
buyer (or transferee), it is called a blank transfer. Badla transactions involve temporary
purchases and sales of securities. If they have to be registered, it involves lot of
inconveniences due to registration fees, stamp duty, etc. Hence, to avoid such
inconveniences blank transfers are increasingly used to carryover the transaction.
38.
39. 17. Circuit breakers
40.
41. Its a mechanism by which Stock Exchanges temporarily suspend the trading in a security
when its prices are volatile and tend to breach the price band.
42.
43. 18. Clearing
44.
45. Clearing is a process through which all transactions between members of stock exchange
are settled through multilateral netting.
46.
47. 19. Company objection
48.
49. For transfer of a security a transferer sends a scrip certificate along with the transfer deed
to the company. In some cases the company refuses the registration of transfer on account
of signature difference, or fake, forged or stolen shares. In such cases the company
returns the documents sent along with a letter which is termed as a 'company objection'.
50.
51. 20. Cornering
52.
53. It refers to the process of holding entire supply of a particular security by an individual or
a group of individuals with a view to dictating terms to the short sellers and earning more
profits.
54.
55. 21. Clearing Settlement
56.
57. Under this method, the transactions are cleared and settled through the clearing house.
Usually those securities which are frequently traded and are usually in demand are
cleared through the clearing house.
58.
59. 22. Client brokers
60.
61. These brokers do simple braking business by acting as intermediaries between the buyers
and sellers and they earn only brokerage for their services rendered to the clients.
62.
63. 23. Cum-bonus
64.
65. The shares are called cum-bonus when a purchaser is entitled to receive the current bonus
declared by company.
66.
67. 24. Cum-rights
68.
69. The share is described as cum-rights when a purchaser is entitled to receive the current-
rights shares declared by the company.
70.
71. 25. Day order
72.
73. A day order, as the name suggests, is an order which is valid for the day on which it is
entered. If the order cannot be executed during the day, it gets cancelled automatically.
74.
75. 26. Discretionary order
76.
77. It is an order placed by a client to buy or sell shares at whatever price the broker thinks
reasonable. This is possible only when the client has complete faith on the broker.
78.
79. 27. Ex-bonus
80.
81. The share is described as ex-bonus when a purchaser is not entitled to receive the current
bonus, the right to which remains with the seller.
82.
83. 28. Ex-rights
84.
85. The share is described as ex-rights when a purchaser is not entitled to receive the current
rights, the right of which remains with the seller.
86.
87. 29. Forward trading
88.
89. Forward trading refers to trading where contracts traded today are settled at some future
date at prices decided today.
90.
91. 30. Good-bad delivery
92.
93. A share certificate together with its transfer form which meets all the requirements of title
transfer from seller to buyer is called good delivery in the market.
94. Delivery of a share certificate, together with a deed to transfer, which does not meet
requirements of title transfer from seller to buyer is called a bad delivery in the market.
95.
96. 31. Hand Delivery Settlement
97.
98. Under this method, the delivery of securities and payment are affected within the time
stipulated in the agreement or within 14 days from the date of contract whichever is
earlier. Most of the transactions are conducted on the basis of hand delivery settlements.
99.
100. 32. Insider Trading
101.
102. It means trading in a company's shares by a person who is associated with that
company. As a result of his association he has a secret price sensitive information about
the company such as expansion plans, financial results, takeover bid, bonus or right issue
etc. He tries to exploit that information and maximise his profit through trading in the
scrip of that company. It is a crime and hence prohibited by stock exchanges.
103.
104. 33. Jumbo certificate
105.
106. A jumbo share certificate is a single composite share certificate issued by
consolidating-a large number of market lots.
107.
108. 34. Jobbers
109.
110. A jobber is a professional independent broker who deals in securities on his own
behalf. Like brokers he does not purchase or sell securities on behalf of a client for a
commission. Instead he purchases the securities in his own name and sells them out when
the prices of those securities increase and thereby earn a profit. He is like a stockist of
security of different companies. He buys securities as a owner, keeps them for a very
short period and sells them for profit known as 'jobbers turn'. He works for a profit and
not for a commission.
111.
112. 35. Lame ducks
113.
114. Lame ducks are bear brokers (expecting decline in prices) who ultimately sell the
securities ultimately at a loss by making wrong moves. They lose in market due to the
wrong prediction that share prices will decline but in reality they increase. Generally,
they contract to sell securities which they do not posses, therefore, they are caught in a
wrong foot.
115.
116. 36. Limit order
117.
118. It is an order for the purchase or sale of a scrip at a fix price specified by the
client. e.g. "Sell 100 TISCO shares @ Rs. 280".
119.
120. 37. Market Lot
121.
122. Market lot refers to the minimum number of shares of a particular security that
must be transacted on the exchange. Market lot may be 10 shares, 20 shares, 50 shares or
100 shares. Multiples of the market lot may also be transacted. In demat scrips the market
lot is 1 share.
123.
124. 38. No-delivery period
125.
126. Whenever a book closure or record date is announced by a company, the
Exchange sets a no-delivery period for that security. During this period, trading is
permitted in that security. However, these trades are settled only after the no-delivery
period is over. This is done to ensure that investor's entitlement for corporate benefits is
clearly determined.
127.
128. 39. Odd lot
129.
130. A number of shares that are less than the market lot are known as odd lots. Under
the scrip based delivery system, these shares are normally traded at a discount to the
prevailing price for the marketable lot.
131.
132. 40. Order-driven trading
133.
134. It is a trading initiated by buy I sell orders, from investors / brokers.
135.
136. 41. Over-the Counter trading
137.
138. Trading in those stocks which are not listed on a stock exchange.
139.
140. 42. Open order
141.
142. It is an order to buy or sell a security received from a client without fixing any
time limit or price limit on the execution of the order. It is similar to discretionary order.
143.
144. 43. Pay-in
145.
146. Pay-in day is the designated day on which the securities or funds are delivered /
paid in by the members to the clearing house of the Exchange.
147.
148. 44. Pay-out
149.
150. Pay-out is the designated day on which securities and funds are delivered I paid
out to the members by the clearing house of the Exchange.
151.
152. 45. Price band
153.
154. The daily / weekly price limits within which price of a security is allowed to rise
or fall.
155.
156. 46. Price rigging (or Rigging the market)
157.
158. When a person or persons acting in concert with each other collude to artificially
increase or decrease the price of a security, that process is called price rigging or rigging
the market. It is an undesirable activity since it prevents the free interplay of demand and
supply. Stock exchanges and SEBI try to discourage such practice.
159.
160. 47. Quote-driven trading
161.
162. Trading where brokers / market makers give buy I sell quote for a scrip
simultaneously.
163.
164. 48. Record date
165.
166. Record date is the date on which the beneficial ownership of an investor is entered
into the register of members. Such a member is entitled to get all the corporate benefits.
167.
168. 49. Rematerialisation of shares
169.
170. It is the process through which shares held in electronic form in depository are
converted into physical form.
171.
172. 50. Screen based trading
173.
174. When buying / selling of securities is done using computers and matching of
trades is done by a stock exchange computer.
175.
176. 51. Settlement
177.
178. It refers to the scrip-wise netting of trades by a broker after the trading period is
over.
179.
180. 52. Settlement guarantee
181.
182. Settlement guarantee is the guarantee provided by the clearing corporation for
settlement of all trades even if a party defaults to deliver securities or pay cash.
183.
184. 53. Splitting /Consolidation
185.
186. The process of splitting shares that have a high face value into shares of a lower
face value is known as splitting. The reverse process of combining shares that have a low
face value into one share of higher value is known as consolidation.
187.
188. 54. Spot trading
189.
190. Trading by delivery of shares and payment for the same on the date of purchase or
on the next day.
191.
192. 55. Stop transfer
193.
194. It is an instruction given by a registered holder of shares to the company to stop
the transfer of shares in his name as a result of theft, misplacement, loss of share
certificates.
195.
196. 56. Stags
197.
198. Stags are those members in share market who neither buy nor sell securities in
stock exchange. They simply apply for subscription to new issues expecting to sell them
at a higher price later when the issues are quoted on stock exchange. Generally, stags buy
new issues and sell them on allotment or even before allotment for a profit. Since they act
fast they are called stags - a fast runner.
199.
200. 57. Spot delivery settlement
201.
202. These transactions are to be settled by delivery and payment on the date of
contract or on the next day.
203.
204. 58. Special delivery
205.
206. Delivery and payment made anytime exceeding 14 days, but not exceeding 2
months, following the date of the contract as may be stipulated when entering into the
bargain and permitted by the Governing Board or the President.
207.
208. 59. Stop Loss Order
209.
210. It is an order by a client to sell as soon as the prices fall upto a particular level or
to buy when the price rises up to a specified level. This is mainly to protect the clients
against a heavy fall or rise in prices so that they may not suffer more than the pre-
specified amount.
211.
212. 60. Trade guarantee
213.
214. Trade guarantee is the guarantee provided by the clearing corporation for all
trades that are executed on the exchange. In contrast, at the settlement guarantee,
guarantees the settlement of trade after multilateral netting.
215.
216. 61. Transfer deed
217.
218. A transfer deed is a form that is used for effecting transfer of shares or debentures
and is valid for a specified period. It should be sent, to the company along with the share
certificate for registering the transfer. The transfer deed must be duly stamped and signed
by or on behalf of the transferor and transferee and complete in all respects.
219.
220. 62. Wash Sales
221.
222. Wash sales is a kind of fictitious transaction through which a speculator is able to
reap huge profit by creating a misleading picture in the market. He makes fictitious sale
of a security and then makes a purchase of the same security at higher price through
another broker. Thus, he creates a misleading opinion in the market as if the price of a
security in question is rising. As a result of such false opinion, when the price of the
security actually rises the speculator sells it to earn a good profit. Wash sale is a kind of
cheating hence stock exchanges impose severe penalty on such sales.
223.
224. 63. Wolves
225.
226. These are the brokers who are fast and smart speculators. They quickly perceive
changes in the trends in the market and trade fast to make profit. They are not generally
caught in the wrong foot.
What is SEBI?

Securities and Exchange Board of India (SEBI) is an apex body for overall development and
regulation of the securities market. It was set up on April 12, 1988. To start with, SEBI was set
up as a non-statutory body. Later on it became a statutory body under the Securities Exchange
Board of India Act, 1992. The Act entrusted SEBI with comprehensive powers over practically
all the aspects of capital market operations.

Picture of SEBI Bhavan in Mumbai. Image Credits Paul Noronha.

Role Functions of SEBI

The role or functions of SEBI are discussed below.
1. To protect the interests of investors through proper education and guidance as regards
their investment in securities. For this, SEBI has made rules and regulation to be followed
by the financial intermediaries such as brokers, etc. SEBI looks after the complaints
received from investors for fair settlement. It also issues booklets for the guidance and
protection of small investors.
2. To regulate and control the business on stock exchanges and other security markets. For
this, SEBI keeps supervision on brokers. Registration of brokers and sub-brokers is made
compulsory and they are expected to follow certain rules and regulations. Effective
control is also maintained by SEBI on the working of stock exchanges.
3. To make registration and to regulate the functioning of intermediaries such as stock
brokers, sub-brokers, share transfer agents, merchant bankers and other intermediaries
operating on the securities market. In addition, to provide suitable training to
intermediaries. This function is useful for healthy atmosphere on the stock exchange and
for the protection of small investors.
4. To register and regulate the working of mutual funds including UTI (Unit Trust of India).
SEBI has made rules and regulations to be followed by mutual funds. The purpose is to
maintain effective supervision on their operations & avoid their unfair and anti-investor
activities.
5. To promote self-regulatory organization of intermediaries. SEBI is given wide statutory
powers. However, self-regulation is better than external regulation. Here, the function of
SEBI is to encourage intermediaries to form their professional associations and control
undesirable activities of their members. SEBI can also use its powers when required for
protection of small investors.
6. To regulate mergers, takeovers and acquisitions of companies in order to protect the
interest of investors. For this, SEBI has issued suitable guidelines so that such mergers
and takeovers will not be at the cost of small investors.
7. To prohibit fraudulent and unfair practices of intermediaries operating on securities
markets. SEBI is not for interfering in the normal working of these intermediaries. Its
function is to regulate and control their objectional practices which may harm the
investors and healthy growth of capital market.
8. To issue guidelines to companies regarding capital issues. Separate guidelines are
prepared for first public issue of new companies, for public issue by existing listed
companies and for first public issue by existing private companies. SEBI is expected to
conduct research and publish information useful to all market players (i.e. all buyers and
sellers).
9. To conduct inspection, inquiries & audits of stock exchanges, intermediaries and self-
regulating organizations and to take suitable remedial measures wherever necessary. This
function is undertaken for orderly working of stock exchanges & intermediaries.
10. To restrict insider trading activity through suitable measures. This function is useful for
avoiding undesirable activities of brokers and securities scams.
11. Role of Stock Exchanges In Capital Market of India
12.
13. Stock Exchanges play a crucial role in the consolidation of a national economy in general
and in the development of industrial sector in particular. It is the most dynamic and
organised component of capital market. Especially, in developing countries like India, the
stock exchanges play a cardinal role in promoting the level of capital formation through
effective mobilisation of savings and ensuring investment safety.
14.
15.
16. Lets study the role of stock exchanges in capital market of India :-
17.
18. 1. Effective Mobilisation of savings
19.
20. Stock exchanges provide organised market for an individual as well as institutional
investors. They regulate the trading transactions with proper rules and regulations in
order to ensure investor's protection. This helps to consolidate the confidence of investors
and small savers. Thus, stock exchanges attract small savings especially of large number
of investors in the capital market.
21.
22. 2. Promoting Capital formation
23.
24. The funds mobilised through capital market are provided to the industries engaged in the
production of various goods and services useful for the society. This leads to capital
formation and development of national assets. The savings mobilised are channelised into
appropriate avenues of investment.
25.
26. 3. Wider Avenues of investment
27.
28. Stock exchanges provide a wider avenue for the investment to the people and
organisations with investible surplus. Companies from diverse industries like Information
Technology, Steel, Chemicals, Fuels and Petroleum, Cement, Fertilizers, etc. offer
various kinds of equity and debt securities to the investors. Online trading facility has
brought the stock exchange at the doorsteps of investors through computer network.
Diverse type of securities is made available in the stock exchanges to suit the varying
objectives and notions of different classes of investor. Necessary information from stock
exchanges available from different sources guides the investors in the effective
management of their investment portfolios.
29.
30. 4. Liquidity of investment
31.
32. Stock exchanges provide liquidity of investment to the investors. Investors can sell out
any of their investments in securities at any time during trading days and trading hours on
stock exchanges. Thus, stock exchanges provide liquidity of investment. The on-line
trading and online settlement of demat securities facilitates the investors to sellout their
investments and realise the proceeds within a day or two. Even investors can switch over
their investment from one security to another according to the changing scenario of
capital market.
33.
34. 5. Investment priorities
35.
36. Stock exchanges facilitate the investors to decide his investment priorities by providing
him the basket of different kinds of securities of different industries and companies. He
can sell stock of one company and buy a stock of another company through stock
exchange whenever he wants. He can manage his investment portfolio to maximise his
wealth.
37.
38. 6. Investment safety
39.
40. Stock exchanges through their by-laws, Securities and Exchange Board of India (SEBI)
guidelines, transparent procedures try to provide safety to the investment in industrial
securities. Government has established the National Stock Exchange (NSE) and Over The
Counter Exchange of India (OTCEI) for investors' safety. Exchange authorities try to
curb speculative practices and minimise the risk for common investor to preserve his
confidence.
41.
42. 7. Wide Marketability to Securities
43.
44. Online price quoting system and online buying and selling facility have changed the
nature and working of stock exchanges. Formerly, the dealings on stock exchanges were
restricted to its head quarters. The investors across the country were absolutely in dark
about the price fluctuations on stock exchanges due to the lack of information. But today
due to Internet, on line quoting facility is available at the computers of investors. As a
result, they can keep track of price fluctuations taking place on stock exchange every
second during the working hours. Certain T.V. Channels like CNBC are fully devoted to
stock market information and corporate news. Even other channels display the on line
quoting of stocks. Thus, modern stock exchanges backed up by internet and information
technology provide wide marketability to securities of the industries. Demat facility has
revolutionised the procedure of transfer of securities and facilitated marketing.
45.
46. 8. Financial resources for public and private sectors
47.
48. Stock Exchanges make available the financial resources available to the industries in
public and private sector through various kinds of securities. Due to the assurance of
liquidity, marketing support, investment safety assured through stock exchanges, the
public issues of securities by these industries receive strong public response (resulting in
oversubscription of issue).
49.
50. 9. Funds for Development Purpose
51.
52. Stock exchanges enable the government to mobilise the funds for public utilities and
public undertakings which take up the developmental activities like power projects,
shipping, railways, telecommunication, dams & roads constructions, etc. Stock exchanges
provide liquidity, marketability, price continuity and constant evaluation of government
securities.
53.
54. 10. Indicator of Industrial Development
55.
56. Stock exchanges are the symbolic indicators of industrial development of a nation.
Productivity, efficiency, economic-status, prospects of each industry and every unit in an
industry is reflected through the price fluctuation of industrial securities on stock
exchanges. Stock exchange sensex and price fluctuations of securities of various
companies tell the entire story of changes in industrial sector.
57.
58. 11. Barometer of National Economy
59.
60. Stock exchange is taken as a Barometer of the economy of a country. Each economy is
economically symbolized (indicators) by its most significant stock exchange. New York
Stock Exchange, London Stock Exchange, Tokyo Stock Exchange and Bombay Stock
Exchange are considered as barometers of U.S.A, United Kingdom, Japan and India
respectively. At both national and international level these stock exchanges represent the
progress and conditions of their economies.
61.
62. Thus, stock exchange serves the nation in several ways through its diversified economic
services which include imparting liquidity to investments, providing marketability,
enabling evaluation and ensuring price continuity of securities
1. Bombay Stock Exchange BSE
BSE is the leading and the oldest stock exchange in India as well as in Asia. It was established in
1887 with the formation of "The Native Share and Stock Brokers' Association". BSE is a very
active stock exchange with highest number of listed securities in India. Nearly 70% to 80% of all
transactions in the India are done alone in BSE. Companies traded on BSE were 3,049 by March,
2006. BSE is now a national stock exchange as the BSE has started allowing its members to set-
up computer terminals outside the city of Mumbai (former Bombay). It is the only stock
exchange in India which is given permanent recognition by the government. At present, (Since
1980) BSE is located in the "Phiroze Jeejeebhoy Towers" (28 storey building) located at Dalal
Street, Fort, Mumbai. Pin code - 400021.


Image Credits Vikram Walia.

In 2005, BSE was given the status of a full fledged public limited company along with a new
name as "Bombay Stock Exchange Limited". The BSE has computerized its trading system by
introducing BOLT (Bombay On Line Trading) since March 1995. BSE is operating BOLT at
275 cities with 5 lakh (0.5 million) traders a day. Average daily turnover of BSE is near Rs. 200
crores.
2. National Stock Exchange NSE
Formation of National Stock Exchange of India Limited (NSE) in 1992 is one important
development in the Indian capital market. The need was felt by the industry and investing
community since 1991. The NSE is slowly becoming the leading stock exchange in terms of
technology, systems and practices in due course of time. NSE is the largest and most modern
stock exchange in India. In addition, it is the third largest exchange in the world next to two
exchanges operating in the USA.


Image Credits Wikimedia.

The NSE boasts of screen based trading system. In the NSE, the available system provides
complete market transparency of trading operations to both trading members and the participates
and finds a suitable match. The NSE does not have trading floors as in conventional stock
exchanges. The trading is entirely screen based with automated order machine. The screen
provides entire market information at the press of a button. At the same time, the system
provides for concealment of the identify of market operations. The screen gives all information
which is dynamically updated. As the market participants sit in their own offices, they have all
the advantages of back office support, and facility to get in touch with their constituents.
1. Wholesale debt market segment,
2. Capital market segment, and
3. Futures & options trading.
3. Over The Counter Exchange of India OTCEI
The OTCEI was incorporated in October, 1990 as a Company under the Companies Act 1956. It
became fully operational in 1992 with opening of a counter at Mumbai. It is recognised by the
Government of India as a recognised stock exchange under the Securities Control and Regulation
Act 1956. It was promoted jointly by the financial institutions like UTI, ICICI, IDBI, LIC, GIC,
SBI, IFCI, etc.


Image Credits Siddhartha Shukla.

The Features of OTCEI are :-
1. OTCEI is a floorless exchange where all the activities are fully computerised.
2. Its promoters have been designated as sponsor members and they alone are entitled to
sponsor a company for listing there.
3. Trading on the OTCEI takes place through a network of computers or OTC dealers
located at different places within the same city and even across the cities. These
computers allow dealers to quote, query & transact through a central OTC computer
using the telecommunication links.
4. A Company which is listed on any other recognised stock exchange in India is not
permitted simultaneously for listing on OTCEI.
5. OTCEI deals in equity shares, preference shares, bonds, debentures and warrants.
6. The Participants of OTCEI are :-
i. Members and dealers appointed by OTCEI,
ii. Companies whose securities are listed,
iii. Investors who trade in the OTCEI,
iv. Registrar who keeps custody of scrip certificates,
v. Settlement Bank which clears the payment between counters, and
vi. SEBI and Government who supervise and regulate the working.