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.