Stock Exchange and its Derivatives


Author: Akshat Tripathi, NMIMS, School Law, Mumbai.

What is Stock?

Stock holding means that the shareholder holds a slice of the company proportional to the amount of shares owned as a percentage of the total outstanding shares of the company. A stock or stake is a financial instrument that reflects ownership of a company or organization and represents a proportionate claim to its assets and profits. The term “equities” is synonymous with common shares since their total market size and exchange volumes are several magnitudes greater than those of preferred shares. There are two major categories of securities, common and preferred. The primary difference between the two is that common shares typically have voting rights that allow the common shareholder to have a voice in corporate meetings where topics such as the election to the board of directors or the naming of auditors are voted on while preferred shares usually do not have voting rights.

What is Stock Exchange?

A critical part of the capital market is the stock exchange market. This promotes trades between financial instrument dealers and targeted purchasers. The Indian stock exchange complies with the laws and regulations laid out by the Securities and Exchange Board of India or SEBI. This authoritative body is responsible for defending the interests of investors and seeks to support India’s capital market. In India, the stock exchange acts as a platform for exchanging financial instruments such as securities, bonds and commodities.

It is a forum where during particular hours of any business day, buyers and sellers come together to exchange financial instruments while adhering to well-defined guidelines from SEBI. However, it is only permitted to invest in certain firms that are listed on the stock exchange. It is also possible to sell securities that are not listed on a reputed stock exchange in an Over The Counter Market’. But those shares in the stock exchange market will not be held high in esteem.

Stock Exchange in India

1. Bombay Stock Exchange – This special stock exchange was founded on Dalal Street in Mumbai in 1875. Not only in Asia, but it is also recognized as the oldest stock exchange and is the ’10th biggest stock exchange in the world.’ As of April, the Bombay Stock Exchange’s estimated market capitalization stands at $4.9 trillion and has about 6000 publicly traded firms.

2. National Stock Exchange – Created in Mumbai in 1992, the NSE is accredited as the leader of India’s demutualized electronic stock exchange markets. The aim of this stock exchange market was to eradicate the monopolistic effect of the Bombay Stock Exchange on the Indian stock market.

Functions of  Stock Exchange

1. Economic Barometer-The stock exchange acts as an economic barometer that represents the state of the economy. It tracks both the big and small shifts in the price of the shares. It is correctly claimed to be the economic heartbeat that defines the state of the economy.

2.  Valuating Securities -The stock exchange aids in the pricing of shares based on supply and demand conditions. The shares issued by profitable and growth-focused firms appear to be priced higher. Securities valuation allows creditors, insurers and governments to fulfill their respective duties.

3. Transactional Security -As the shares exchanged on the stock exchange are listed, transactional confidentiality is maintained and the listing of securities is performed after checking the status of the firm. The rules and regulations as set down by the governing body must be complied with by all the companies mentioned.

4.  Promotes Liquidity -In maintaining a ready market for the selling and purchasing of shares, the most important function of the stock exchange is. This provides investors the hope that current assets will be turned into cash or in other words, that the stock market provides investment liquidity.

5. Encourage Investment- The stock exchange acts as a significant source of investing in diverse stocks promising better returns. A better investment option than gold and silver is made by trading in the stock market.

Advantages of Listing in Stock Exchange

1. Increased value- Only securities traded on a respectable stock exchange are known as having a higher valuation. By raising their number of shareholders, businesses will cash in on their business credibility in the stock exchange market. Issuing market securities to be bought by customers is a powerful way to expand the shareholder base and structure, which in turn enhances their reputation.

2. Issuance of Collateral- Nearly all lenders accept listed securities and expand credit facilities against them as collateral. A public business is more likely to receive quicker approval for its debt proposal because it is found more reliable on the stock exchange market.

3. Structured Capital -One of the most successful methods of using inexpensive money for a company is to gain shareholders by selling company securities on the stock exchange market. Thanks to their reputation in the stock exchange market, listed firms can raise comparatively more money by equity offering and use it to keep their business solvent and their operations going.

Process of  Registeration

1. Registration is the mechanism by which a company registers with the Securities and Exchange Commission (SEC) the necessary paperwork, describing the details of a potential public offering. There are usually two sections of the registration: the prospectus and private filings. The prospectus is a paper presented to any investor who buys the safe, while the private filing is material provided for review by the SEC.

2. A registration statement, Form S-1, must be lodged with the Securities and Exchange Commission by the firm. The declaration contains the prospectus, the paper that you send to those looking to purchase your shares. Your market practices, financial health, management and risk factors have to be listed correctly in the prospectus. This also contains financial statements that have been audited. Outside of what you put in the prospectus, the SEC still wants added financial information. If you think your information is incorrect, deceptive, or incomplete, the SEC could refuse your registration.

3. The initial public offering (IPO) process is a lengthy and difficult one that involves several months of work and large volumes of paperwork. A corporation that issues shares must disclose important details and specific information about its business during the registration period while filing for an IPO. This category of material provides a summary of the company’s business and properties, a description of the security provided, additional descriptions of the offer, a description and the identities of the management of the company, and the financial statements of the company approved by an accountant who operates independently of the company. The SEC requires that before it can go public, a corporation should have at least three years of audited financial statements. The steps involved in the IPO are:

  •  Selection of Investment bank- The first step in the IPO process includes the appointment of an investment firm by the issuing company to advise the company on its IPO and to offer underwriting services.
  •  Diligence and regulatory filings -Underwriting is the mechanism by which an investment bank (the underwriter) serves as a broker to help the issuing company sell its original collection of shares between the issuing company and the buying public.
  • Underwriters Documents – The declaration of incorporation shall consist of material related to the IPO, the company’s financial statements, management history, insider holdings, any regulatory issues incurred by the company and the ticker symbol to be used by the issuing company after the company has been listed on the stock exchange. The SEC demands that after the particulars of the issue have been settled upon the issuing entity and its underwriters file a registration document. The underwriter produces an initial prospectus during the cooling-off phase that consists of the issuing company’s data, the effective date and the bid price. The issuance business and the underwriters sell the securities to public investors until the Red Herring Paper has been established. Mostly, underwriters go to road shows to sell the stock to retail buyers for 3 to 4 weeks to determine the appetite for the shares.
  •  Pricing Policy -The effective date is determined after the IPO has been approved by the SEC. The bid price, which is the price at which the stock will be offered by the issuing company and the exact number of shares to be sold, will be determined on the day before the effective date by the issuing company and the underwriter. It is necessary to determine the bid price because it is the price at which the issuing firm raises money for itself.
  •  Stability -The underwriter needs to provide analyst recommendations, post-market stabilisation, and establish a market for the released stock after the problem has been brought to the market. In the case of order imbalances, the underwriter performs after-market stabilisation by buying securities at or below the offering price. Stabilization operations can only be carried out for a short period of time, but when laws on market coercion are relaxed, the underwriter has the right to exchange and manipulate the price of the issue over this period of time.
  • Market transition – The final phase of the IPO process, the transition to market competition, begins 25 days after the initial public offering, once the SEC’s mandatory ‘quiet period has expired. During this time investors have moved from relying on mandatory disclosures and prospectuses to relying on market forces to gain information on their securities. After the 25-day duration lapses, underwriters can include forecasts of the issuing company’s earnings and valuations. Thus, once the dilemma has been developed, the underwriter assumes the positions of advisor and evaluator.

4. The prospectus offers the investors a rundown of the company’s securities offering, including the value, what the funds raised will be used for, and the company’s contact information. The first bidding paper that a security issuer must issue is a preliminary prospectus. This is also regarded as the text of the red herring. Finalized details shall be contained in the final prospectus, including the exact number of shares/certificates issued and the precise offering price printed after the arrangement has been made effective.

5. The SEC shall, after the registration information has been submitted to the SEC, conduct a review of the information, provide input and if necessary, request any changes. Usually, the SEC answers within 30 days of the initial registration being filed. Certain shares are excluded from the registry process of the SEC. This  include restricted and private deals, as well as offerings for local, state and federal protection.


The backbone of the securities industry is investors. They decide not just the level of activity in the stock market, but the level of activity in the economy as well. The rise in India’s investor numbers is promising. Trends suggest that retail investors, in addition to FIIs and institutional investors, have also steadily started to recover trust in the financial markets that have been rocked by stock market scams over the past decade.

  • Investor Protection Fund – Under Sec. 205 C of the Companies Act, 1956, the Government has set up an Investor Education and Security Fund (IEPF) under which unclaimed assets are paid via the IEPF to the Government by the corporation at the end of seven years due to dividends, matured deposits, matured debentures, share application capital, etc. The government is expected, through an Investor Education and Security Fund, to use this number. For this reason, the proceeds from the companies are credited from this fund to the Consolidated Fund of India.
  •  Investor Aware  program – The Prime Minister, in launching the SEBI Securities Market Awareness Campaign (January 2003), said that the protracted quietness of the financial markets had challenged the confidence of a small investor who was the bedrock of the securities market. If buyers are not drawn, so in the stock market, firms will not be able to raise funds. The Indian household investor put much of his savings on non-financial properties, off late. And with physical reserves, the banking sector earns much of the savings. He said that this is not the greatest or the most efficient use of our savings. There have been several examples in recent years of firms collecting capital from the public by generating speculation and thus defrauding the investor. Many of them released hefty premium shares; much of their scrip is now priced way below their nominal value.
  • Compensatory Benefits – The stock market requires transactions in instruments that hold risks. In such situations, the investor is obligated to make his own risk and benefit calculation. For these investors whose portfolios were in risk-bearing securities, no compensation could be visualised. Similarly, the investment in a fixed return instrument allowed the borrowing agency to conduct a rigorous analysis. Such interventions will be susceptible to identified or declared threats as well. In addition, the stock exchange offers an incentive for an individual to exit as well. Therefore it is important to ensure the safe and stable functioning of the economy so that investors can exercise their exit opportunities in a fair and equal environment.


1. Fraser Sherman , study : How to get listed on the stock Market , chron, (21st March , 2019) , available at

2. Nishant Thapliyal , study : how a private company can be registered to stock market , India study channel , ( 20th march , 2013) , available at

3. Adam Hayes , study : How does the stock Market work , investopedia , (13th July , 2020) , available at

4. Joshua Kennon , study : Defination and examples of stock exchanges , the balance , (17th September , 2020 ) , available at

5. Refusal of listing by a stock exchange ( 13th June , 2017 ) , Law times journal , available at

6. Revati Krishna , study : What happens when a company gets delisted and you still own the shares , Groww , ( 8th June , 2020) , available at