Page 35 - DCOM504_SECURITY_ANALYSIS_AND_PORTFOLIO_MANAGEMENT

Security Analysis and Portfolio Management

Notes also act as underwriters to new issues. In this way, the broker community provides an organized
linkage between the primary and the secondary markets.
Thirdly, by providing a market quotation of the prices of shares and bonds: A sort of collective
judgment simultaneously reached by many buyers and sellers in the market – the stock exchange
serves the role of barometer, not only of the state of health of individual companies, but also of
the nation's economy as a whole. It is often not realized that changes in share prices are brought
about by a complex set of factors, all operating in the market simultaneously. Share values as a
whole are subject to secular trends set by the economic programme of the nation, and governed
by factors like the general economic situation, financial and monetary policies, tax changes,
political environment, international economic and financial developments, etc. These trends
are influenced to some extent by periodical cycles of booms and depressions in the free market
economics. As against these long-term trends, the day-to-day prices are influenced by another
variety of factors notably, the buying or selling of many operators, the buying and selling of
shares by the investment financial institutions such as the UTI or LIC, which have in recent years
emerged as the largest holders of corporate securities. Speeches and pronouncement by ministers
and other government spokesmen, statements by company chairmen at annual general meetings
and reports of bonus issues or good dividends by companies etc. play their part. While these
factors, both long-term and short-term, act as macro influences on the corporate sector and the
level of stock prices as a whole, there are also many of micro influences relating to prospects of
individual companies such as the reputation of the related prospected capitalizations of reserves,
etc. which have a bearing on the level of prices. In the complex interplay of all the forces, which
leads to day-to-day quotation of prices of all listed securities, speculation plays a crucial role. In
absence of speculative operations, every purchase by an investor has to be matched by a sale of
the same security by an investor-seller, and this may lead to sharp fluctuation in prices. With
speculative sale and purchase continuously, actual sale and purchase by investors on a large
scale are absorbed by market with changes in prices. There are always some professional operators
who hope that the prices would rise and others who predict that prices will fall. Both these
groups acting on their respective assumption buy or sell continuously in the market. Their
operation helps to bring about an orderly adjustment of prices. Without these active operations,
a stock exchange can become a very mechanical thing. However, excessive speculation hinders
the market-equilibrium and must be discouraged through appropriate safeguards. The regulatory
authorities always take necessary precautionary measures to prevent and penalize excessive
speculation and trading.

A fact which needs to be emphasized is that the stock exchanges in India also serve the joint
sector units as income extent public sector enterprises. There is substantial private participation
in the share capital of government companies such as Balmer Lawrie, Ander Yule, Gujarat State
Fertilizers Corporation, Narmada Fertilizers Corporation, Hyderabad Allwyn, Polymers
Corporation of Gujarat etc. In recent times, some central public sector companies have gone in
for public debentures through stock exchanges. There are some public sector companies which
have made their share capital open for public subscriptions. Another important function that the
stock exchanges in India discharge is of providing a market for gilt-edged i.e., securities issued
by the Central Government, state government, municipalities, etc., Trading transactions in
these take place regularly on the stock exchanges.

1.3.4 Membership, Organization and Management

With the rich legacy of more than a century-old tradition, stock exchanges around the world
have a highly organized and smoothly functioning network. The membership of stock exchanges
initially comprised of individuals and partnership firms. Later on, these were also allowed to
become members. A number of financial institutions are now members of Indian exchanges.
Over the years, stock exchanges have been organized in various forms. For example, while the

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