Page 63 - DCOM507_STOCK_MARKET_OPERATIONS

Stock Market Operations

Notes But, when the securities are bought with the sole object of selling them in future at higher prices
or these are sold now with the intention of buying at a lower price in future, are called speculation
transactions. The main objective of such transactions is to take advantage of price differential at
different times. The stock exchange also provides for settlement of such transactions even by
receiving or paying, as the case may be, just the difference in prices.

Example: Rashmi bought 200 shares of Moser Baer Ltd. at ` 210 per share and sold them
at ` 235 per share. He does not take and give delivery of the shares but settles the transactions by
receiving the difference in prices amounting to ` 5,000 minus brokerage. In another case, Mohit
bought 200 shares of Seshasayee Papers Ltd. at `87 per share and sold them at ` 69 per share. He
settles these transactions by simply paying the difference amounting to ` 3600 plus brokerage.
However, now-a-days stock exchanges have a system of rolling settlement. Such facility is
limited only to transactions of purchase and sale made on the same day, as no carry forward is
allowed.
Though speculation and investment are different in some respects, in practice it is difficult to say
who is a genuine investor and who is a pure speculator. Sometimes even a person who has
purchased the shares as a long-term investment may suddenly decide to sell to reap the benefit
if the price of the share goes up too high or do it to avoid heavy loss if the prices starts declining
steeply. But he cannot be called a speculator because his basic intention has been to invest. It is
only when a person’s basic intention is to take advantage of a change in prices, and not to invest,
then the transaction may be termed as speculation. In strict technical terms, however, the transaction
is regarded as speculative only if it is settled by receiving or paying the difference in prices
without involving the delivery of securities. It is so because, in practice, it is quite difficult to
ascertain the intention. Some people regard speculation as nothing but gambling and consider
it as an evil. But it is not true because while speculation is based on foresight and hard calculation,
gambling is a kind of blind and reckless activity involving high degree of chance element. No
only that, speculation is a legal activity duly recognised as a prerequisite for the success of stock
exchange operations while gambling is regarded as an evil and a punishable activity. However,
reckless speculation may take the form of gambling and should be avoided.

Did u know? Earlier trading in the stock exchange was held face-to-face (called pit-trading)
without the use of computers and the advanced computer software as it is today. In those
times, transactions were settled (i.e., actual delivery of shares, through share certificates,
by the seller and payment of money by the buyer) in the stock exchange, only on a fixed
day of the week, say on a Saturday, or a Wednesday irrespective of which day of the week
the shares were bought and sold. This was called 'Fixed Settlement'.
Self Assessment

Fill in the blanks:
9. Good performance and outlook for shares in the stock exchanges imparts
.............................................. to the new issue market.
10. .............................................. reflect the changing conditions of economic health of a country,
as the shares prices are highly sensitive to changing economic, social and political conditions.

3.6 Investment Procedure in Stock Market

Exchanges have a trading floor where the buying and selling of securities take place. Individuals
or firms (brokers) are required to purchase a seat or membership of the stock exchange in order

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