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A stock, also referred to as a share, is
commonly a share of ownership in a corporation. A stock exchange is
a market in which securities are bought and sold, and it is an
essential component of a developed capital market. It is
indispensable for the proper functioning of corporate enterprise. It
brings together large amounts of capital necessary for the progress
of a country. It is the citadel of capital and the pivot of money
markets.
There are two important types of trading on
the stock exchange; namely, ready delivery contract and forward
delivery contract. Ready delivery contracts, also known as cash
trading or cash transactions, are to be settled either on the same
date or within a short period that may extend at best up to seven
days. Forward delivery contracts are discharged on fixed settlement
days. Ready delivery contracts can be made for all securities,
whereas forward delivery contracts are confined to those securities
which are placed oft the forward list.
Stock exchange
transactions are made either for the purpose of investment or for
speculation. Investment transactions are made with the intention of
earning a return on the securities by holding them more or less
permanently, whereas speculative transactions are made with the
intention of making short-term gains by disposing of the securities
at favorable prices.
The nature of the investment
transaction and speculative transaction differs. The investment
transaction requires the actual delivery of securities on the part
of sellers, and the payment of their full price by the buyers.
Speculative transactions, on the other hand, do not involve full
payment for and taking delivery of the securities that the
speculators have contracted to transfer. As the speculative
transactions do not call for the payment of the full price but can
be made by the deposit of a fractional part of the price, the volume
of speculative transactions usually far exceeds that of the
investment transactions on any stock exchange. It is, therefore,
argued that speculation is necessary to ensure sufficient volume and
continuity of business in the stock exchange.
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