The History of Bombay Stock Exchange

The Bombay Stock Exchange is known as the oldest exchange in Asia.

It traces its history to the 1850s, when stockbrokers would gather under banyan trees in front of Mumbai's Town Hall.

The location of these meetings changed many times, as the number of brokers constantly increased.

The group eventually moved to Dalal Street in 1874 and in 1875 became an official organization known as 'The Native Share & Stock Brokers Association'.

Sir Phiroze Jeejeebhoy was another who dominated the stock market scene from 1946 to 1980. His word was law and he had a great deal of influence over both brokers and the government. He was a good regulator and many crises were averted due to his wisdom and practicality. The BSE building, icon of the Indian capital markets, is called P.J. Tower in his memory.

In 1956, the BSE became the first stock exchange to be recognized by the Indian Government under the Securities Contracts Regulation Act.

The Bombay Stock Exchange developed the BSE Sensex in 1986, giving the BSE a means to measure overall performance of the exchange.

In 2000 the BSE used this index to open its derivatives market, trading Sensex futures contracts.

The development of Sensex options along with equity derivatives followed in 2001 and 2002, expanding the BSE's trading platform.

Historically an open-cry floor trading exchange, the Bombay Stock Exchange switched to an electronic trading system in 1995. It took the exchange only fifty days to make this transition.

Investment and Financial Intermediation

• An investment, broadly defined, is an action that creates a cost today but provides benefits in the future.

• It is difficult to bring savers and investors together. Households save for different reasons than firms invest. Households try to minimize risk and have their savings readily accessible, or liquid, while firms are risk takers and need funds that will be tied up for a long time.

• Financial intermediaries create a valuable link between savers and investors. Without financial intermediaries, society would not be able to turn its savings into profitable investment projects.

Financial intermediaries help bring savers and investors together. By using their expertise and the powers of diversification, financial intermediaries reduce risk to savers and allow investors to obtain funds on better terms.

Why Financial Intermediaries Emerge

• By pooling the funds of savers and making loans to individual businesses, financial intermediaries reduce the costs of negotiation.

• Financial intermediaries also acquire expertise in both evaluating and monitoring investments.

• Some financial intermediaries also provide the liquidity households demand.

What is Investing?

Criteria used to determine whether an investment of money is investing or something else, including:

– Is it short-term or long-term?

– Is it productive or unproductive?

– Is it legal or illegal?

– Is it rational or irrational?

Gambling occurs when

– Outcome is determined very quickly (a roll of the dice, for instance)

– A source of entertainment

– Outcome is not based on an economic endeavor, but, rather, random outcomes

– Creates risk without expectation of economic benefit

Speculation occurs when

– An asset is purchased with hope that price will rise rapidly, leading to quick profit

– Not based on random outcomes

Example: Buying an IPO of a stock on the first day hoping to sell it in several days at a higher price

Major asset classes include

– Primary securities such as common and preferred stock, government bonds, corporate bonds, Treasury bills, commercial paper

– Derived instruments such as mutual funds, put and call options, forward and futures contracts

– Physical assets such as houses, land, buildings, diamonds, gold