Here is a comprehensive study note for the AHSEC Class 12 Finance textbook, focusing on Chapter 11: Stock Exchange or Secondary Market.
Chapter 11: Stock Exchange
Summary Note
This chapter covers the Secondary Market, commonly known as the Stock Exchange. This is the market where existing, previously issued securities are bought and sold.
- Meaning of Stock Exchange:
- A stock exchange is a highly organized market that provides a platform for the trading (buying and selling) of existing securities like shares, debentures, and bonds.
- According to the Securities Contracts (Regulation) Act 1956, it is an “association, organization or body of individuals… established for the purpose of assisting, regulating or controlling the business of buying, selling and dealing in securities.”
- It is called the secondary market because securities are traded here after their initial issue in the primary market.
- Modern stock exchanges are largely virtual, with trading conducted electronically. The NASDAQ was the world’s first virtual stock exchange.
- Features of a Stock Exchange:
- A Market for Securities: It is a dedicated market for trading securities.
- Deals in Existing Securities: Only securities that have already been issued in the primary market are traded here.
- Regulated Trade: All transactions are governed by the rules and regulations of the exchange and SEBI.
- Deals Only in Listed Securities: Only securities that have been officially “listed” on the exchange can be traded.
- Transactions through Members: Transactions can only be carried out by authorized brokers who are members of the exchange.
- Functions of a Stock Exchange:
- Provides Liquidity and Marketability: It offers a ready and continuous market where investors can easily convert their securities into cash.
- Facilitates Evaluation of Securities: The prices of securities, determined by demand and supply, are quoted on the exchange, allowing investors to know the current worth of their holdings.
- Mobilisation of Savings: It channels savings into productive investments by providing a safe and regulated platform for people to invest in securities.
- Safety of Funds: By operating under strict rules and regulations, it ensures the safety of funds invested by the public.
- Helps in Marketing of New Issues: The prospect of having shares listed on a stock exchange makes new issues more attractive to investors.
- Role of an Economic Barometer: The performance of the stock exchange (i.e., the movement of stock prices) reflects the overall health of the country’s economy. It is often called the “pulse of the economy.”
- Listing of Securities:
- Meaning: Listing means admitting the securities of a company to the official list of a stock exchange for the purpose of trading.
- Objectives: To provide liquidity to securities, ensure effective control over trading, and mobilize savings for economic development.
- Formalities: A company must apply in a prescribed form and submit numerous documents, including its Memorandum and Articles of Association, prospectus, audited accounts, and details of its capital structure.
- Conditions: Key conditions include a minimum issued capital, a minimum public offer, and a broad-based capital structure to ensure public interest.
- Stock Broker:
- Meaning: A stock broker is an agent and a member of a stock exchange who buys and sells securities on behalf of the principal (investor).
- Registration: All brokers must be registered with the Securities and Exchange Board of India (SEBI).
- Functions: A broker’s functions include client registration, executing orders, issuing contract notes, and ensuring payment and delivery of securities.
- Kinds of Brokers: Brokers can be categorized based on their market outlook:
- Bull (Tejiwala): Expects prices to rise and buys securities to sell later at a higher price.
- Bear (Mandiwala): Expects prices to fall and sells securities (often through short selling) hoping to buy them back later at a lower price.
- Stag: A speculator who applies for new issues hoping to sell them at a premium as soon as they are listed.
- Jobber: An independent dealer who buys and sells securities for their own account to make a quick profit from price differences.
- Sub-broker: A sub-broker is a person who is not a member of a stock exchange but acts as an agent for a stock broker, bringing clients to the brokerage firm and assisting them with their transactions.
Complete Textual Question Answers
Here are the answers to all the questions given at the end of Chapter 11.
A. Write the correct answer as directed (1 Mark each)
- Which of the following regulates the stock exchange in India? (i) RBI (ii) IRDA (iii) SEBI (iv) IBA
Ans: (iii) SEBI (Securities and Exchange Board of India) - Stock exchange is an organized market. (State whether the statement is true or false)
Ans: True. - Stock market transacts in commodities. (State whether the statement is true or false)
Ans: False. (Stock market transacts in securities; commodity market transacts in commodities). - Bulls expects a ………… in price in the future. (Fill in the gap)
Ans: rise - Write the full form of BSE.
Ans: Bombay Stock Exchange. - Write the full form of NASDAQ.
Ans: National Association of Securities Dealers Automated Quotations. - Write the full form of NSE.
Ans: National Stock Exchange. - Write the full form of SEBI.
Ans: Securities and Exchange Board of India. - Who is a jobber?
Ans: A jobber is a type of independent dealer in a stock exchange who buys and sells securities for their own account to make a quick profit from price differences.
B. Short Answer Questions (2 Marks each)
- What is stock exchange?
Ans: A stock exchange is an organized market where existing securities like shares, debentures, and bonds are bought and sold. It provides a platform for investors to trade in securities under a regulated framework. - Write two features of stock exchange.
Ans: Two features of a stock exchange are:
i. A market for securities: It is a specific market where securities of various companies are bought and sold.
ii. Deals only on the listed securities: Only those securities that are officially admitted for trading (listed) on the exchange can be transacted. - Write two names of stock exchanges functioning in India.
Ans: Two major stock exchanges functioning in India are (i) Bombay Stock Exchange (BSE) and (ii) National Stock Exchange (NSE). - State two functions of stock exchange.
Ans: Two functions of a stock exchange are:
i. Facilitate a Ready and Continuous Market for Securities: It provides a platform where securities can be bought and sold at any time, ensuring liquidity.
ii. Facilitate Evaluation of Securities: The prices quoted on the exchange help investors evaluate the worth of their holdings. - What is listing of securities?
Ans: Listing of securities is the process of admitting the securities of a company to the official list of a stock exchange for the purpose of trading. Without listing, a security cannot be traded on that exchange. - Write two objectives of listing of securities.
Ans: Two objectives of listing securities are:
i. To provide liquidity to securities.
ii. To provide a mechanism for effective control and supervision of trading. - Write two conditions of listing of securities.
Ans: Two conditions for listing securities are:
i. The minimum public offer should be 25 per cent for each issue.
ii. The company should be of a fair size with a broad-based capital structure and public interest in its securities. - Who is a stock broker?
Ans: A stock broker is an agent and a member of a stock exchange who buys and sells securities on behalf of their clients (investors) in return for a commission called brokerage. - Write two qualifications of a stock broker.
Ans: Two qualifications of a stock broker are:
i. He or she should be an Indian citizen with a minimum age of 21 years.
ii. He or she should have passed the 12th standard examination. - State two functions of a stock broker.
Ans: Two functions of a stock broker are:
i. Execution of order: To execute the client’s order to buy or sell securities on the stock exchange system.
ii. Issue of contract note: To issue a contract note to the client with all relevant details of the trade within 24 hours of its execution. - Who is a sub-broker?
Ans: A sub-broker is a person who is not a member of a stock exchange but works as an agent for a registered stock broker. They act as a middleman between the stock broker and the investor, helping to bring in clients. - State two functions of a sub-broker?
Ans: Two functions of a sub-broker are:
i. To mediate between the broker and the client and assist in financial transactions.
ii. To bring new clients to the brokerage firm. - How a sub-broker can be registered?
Ans: A sub-broker must register with SEBI through a registered stock broker. The registration process is similar to that of a stock broker, requiring them to fulfill eligibility criteria and pay the requisite fees. - State any two kinds of brokers.
Ans: Two kinds of brokers are (i) Bull (who expects prices to rise) and (ii) Bear (who expects prices to fall). - Who is a Bull?
Ans: A Bull is a type of broker or speculator who expects the price of securities to rise in the future. They purchase securities at a lower price with the hope of selling them at a higher price later. - Who is a Bear?
Ans: A Bear is a type of broker or speculator who expects the price of securities to fall in the future. They often sell securities they do not own (short selling) with the intention of buying them back at a lower price. - Who is a Stag?
Ans: A Stag is a type of speculator who applies for shares in a new issue (IPO) with the sole intention of selling them at a premium as soon as they are listed on the stock exchange, thereby making a quick profit.
C. Long answer questions (Type-1) (5 Marks each)
- State the features of stock exchange.
Ans: (Refer to the “Features of a Stock Exchange” section in the summary and elaborate on five points like being a market for securities, dealing in existing securities, regulating trade, dealing only in listed securities, and conducting transactions through members). - Write five functions of stock exchange.
Ans: (Refer to the “Functions of a Stock Exchange” section in the summary and elaborate on five points like providing liquidity, facilitating evaluation of securities, mobilizing savings, ensuring safety of funds, and acting as an economic barometer). - What is listing of securities? State the objectives of listing of securities.
Ans: (First, define ‘Listing of Securities’ as explained in B.5. Then, state and explain its objectives, such as providing liquidity, enabling control and supervision, mobilizing savings, providing free negotiability, and enhancing the ability to raise further capital). - State the formalities required for listing of securities.
Ans: (List and briefly explain the key documents and formalities required for listing, such as certified copies of MOA and AOA, prospectus, audited accounts for the last five years, details of capital structure, and the listing agreement). - State the conditions of listing of securities.
Ans: (List and explain the key conditions a company must satisfy for listing, such as minimum issued capital, minimum public offer percentage, broad-based shareholding, and having fully paid-up shares free from lien). - Who is a stock broker? State the qualifications of a stock broker.
Ans: (Combine the answers from B.8 and B.9, providing a more detailed explanation for 5 marks). - Who is a stock broker? State the registration procedure of a stock broker.
Ans: (First, define a stock broker. Then, explain the registration procedure step-by-step: submission of application to the stock exchange, evaluation by the membership committee, approval, payment of fees, and final registration with SEBI). - Write five functions of a stock broker.
Ans: (Refer to the answer for B.10 and add three more functions, such as client registration, obtaining margin money, and maintenance of separate bank accounts for clients). - Who is a sub-broker? State the job of a sub-broker.
Ans: (Combine the answers from B.11 and B.12, providing a more detailed explanation of the role and responsibilities of a sub-broker). - Who is a stock broker? State the various kinds of stock broker.
Ans: (First, define a stock broker. Then, explain the four main kinds of brokers/speculators: Bull, Bear, Stag, and Jobber, detailing the strategy of each).
D. Long answer questions (Type-2) (8Marks each)
- What is stock exchange? Discuss the features of stock exchange.
Ans: (Combine the answers from B.1 and C.1. Start with a comprehensive definition of a stock exchange, and then discuss its features in detail). - What is stock exchange? Discuss the functions of stock exchange.
Ans: (Combine the answers from B.1 and C.2. Start with a comprehensive definition of a stock exchange, and then discuss its various functions in detail, explaining its importance to investors, companies, and the economy as a whole). - Who is a stock broker? State the functions of a stock broker.
Ans: (Combine the answers from B.8 and C.8. Start with a clear definition of a stock broker and their role as an intermediary. Then, discuss their various functions in detail, from client registration and order execution to settlement and advisory services).
Previous Year AHSEC Question Answers (2015-2025)
Short Questions (1-2 Marks)
- What is a Stock Exchange? (AHSEC 2015, 2019)
Ans: A stock exchange is an organized market where existing securities like shares, debentures, and bonds are bought and sold. - What is Listing of Securities? (AHSEC 2016)
Ans: Listing of securities is the process of admitting a company’s securities to the official list of a stock exchange, which makes them eligible for trading on that exchange. - Who is a Bull in a stock exchange? (AHSEC 2017)
Ans: A Bull is a speculator in a stock exchange who expects the price of securities to rise in the future and buys them with the hope of selling at a higher price. - Mention two functions of a Stock Exchange. (AHSEC 2018, 2022)
Ans: Two functions of a stock exchange are: (i) Providing liquidity and marketability to existing securities, and (ii) Mobilisation of savings for productive investment. - Write the full form of SEBI. (AHSEC 2020)
Ans: The full form of SEBI is the Securities and Exchange Board of India.
Long Questions (5-8 Marks)
- Discuss the functions of a Stock Exchange. (AHSEC 2017, 2021)
Ans: (This answer is the same as the textual Long Answer Question D.2. Please refer to that answer above). - What is Listing of Securities? State its objectives. (AHSEC 2018)
Ans: (This answer is the same as the textual Long Answer Question C.3. Please refer to that answer above).
10 Most Important Questions
- What is the main difference between the Primary Market and the Secondary Market?
Ans: The Primary Market deals with the first-time issue of new securities to raise capital, while the Secondary Market (Stock Exchange) deals with the trading of already existing securities. - Why is a stock exchange called an ‘economic barometer’?
Ans: It is called an economic barometer because the movement of stock prices on the exchange reflects the performance of companies and the overall state of the economy, indicating periods of boom or recession. - What does it mean for a security to be ‘listed’?
Ans: For a security to be ‘listed’ means it has been officially approved and included in the list of securities that can be traded on a particular stock exchange. - Who is a ‘Bear’ in the stock market?
Ans: A ‘Bear’ is a speculator who anticipates that the prices of securities will fall. They often sell securities (short selling) with the hope of buying them back later at a lower price to make a profit. - What is the role of SEBI in relation to stock exchanges?
Ans: SEBI (Securities and Exchange Board of India) is the primary regulator of stock exchanges in India. It sets the rules and regulations for their functioning to protect the interests of investors and ensure fair practices. - Why can’t an ordinary investor buy or sell shares directly on a stock exchange?
Ans: An ordinary investor cannot trade directly because transactions on a stock exchange can only be executed by its registered members, who are the stock brokers. Investors must go through a broker to trade. - What is a ‘contract note’?
Ans: A contract note is a confirmation document issued by a broker to a client within 24 hours of a trade. It contains all the details of the transaction, including the number of shares, price, date, time, and brokerage charges. - What is the main objective of ‘listing’ securities?
Ans: The main objective of listing securities is to provide liquidity, meaning the ability for investors to easily buy or sell the securities and convert them into cash. - Differentiate between a broker and a jobber.
Ans: A broker is an agent who buys and sells securities on behalf of their clients for a commission. A jobber is an independent dealer who buys and sells securities for their own account to profit from price differences. - What is the significance of the Securities Contracts (Regulation) Act, 1956?
Ans: This Act provides the legal framework for regulating the business of dealing in securities in India. It defines what a stock exchange is and lays down the rules for their recognition and operation.
