A stock exchange is a centralized location where the shares of publicly traded companies are bought and sold. In addition, financial assets like bonds, ETFs, and Financial derivatives are also traded on a stock exchange.
A stock exchange brings together buyers and sellers, enabling them to exchange securities. Securities include shares, bonds, investment trusts, and exchange-traded funds. Participants in a stock market include individuals, corporates, institutional investors, etc. Institutional investors mean fund managers, insurance companies, banks, and pension funds. An institutional investor could be a domestic or foreign institution.
Stock Exchange: As per the Securities Contracts (Regulations) Act
According to the Securities Contracts (Regulation) Act 1956, a stock exchange means a body of individuals, whether incorporated or not, constituted to assist, regulate, or control the business of buying, selling, or dealing in securities.
What are the Main Features of a Stock Exchange?
- First, it is an organized market.
- It provides a place where existing and approved securities can be bought and sold quickly.
- In a stock exchange, transactions occur between its members and authorized agents.
- All transactions are regulated by the rules and laws of the concerned stock exchange.
- It makes complete information available to the public regarding prices and the volume of transactions occurring daily.
It may be noted that all securities are not permitted to be traded at a recognized stock exchange. Trading is allowed only in those securities that have been duly approved for trading at a stock exchange. Such securities are also termed listed securities. However, the trading method nowadays is relatively simple because of the availability of an online trading facility with the help of computers and the internet. It is also quite fast as it takes just a few seconds to strike a deal through the brokers.
Similarly, on account of the scrip-less trading and rolling settlement system, the delivery of securities and the payment of the amount involved also take very little time, say, two days.
Important Stock Exchanges Around the World
There are numerous stock exchanges around the world. Some of the largest exchanges are the New York Stock Exchange (NYSE), the NASDAQ, the Tokyo Stock Exchange (JPX), London Stock Exchange (LSE). Prominent stock exchanges in India are the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE).
The history of stock exchanges in India dates back to 1875 when a group of people started the modern BSE under a tree. In 1965, BSE got permanent recognition from the Government of India. After that, other stock exchanges were approved by the Ministry of Finance. After the SEBI was formed, it was given powers to regulate the Indian Stock market.
Today BSE and NSE represent themselves as synonyms of the Indian Stock market. The history of the Indian Stock market is almost the same as that of BSE. Till 1992, Indian Stock Exchanges were a kind of self-regulated institution. After the setup of the Securities and Exchange Board of India (SEBI), all stock exchanges came under its fold, and the SEBI became the regulator of the Indian Stock market.
Stock Exchanges in India
Following are the two most important stock exchanges in India.
National Stock Exchange (NSE)
NSE was set up by a group of leading Indian Financial Institutions in 1992 as a company and was recognized as a Stock Exchange in 1993 under the Securities Contracts (Regulation) Act, 1956. It started trading activities in 1994. It is the largest and most modern stock exchange in India.
The NSE is located in Mumbai. It was the first demutualized electronic exchange in India. In addition, NSE was the first exchange in the country to provide a modern, fully automated screen-based electronic trading system that offered an accessible trading facility to investors. The main index of NSE is the NIFTY which was launched in 1996.
Like BSE, the NSE has its index of stocks that traders and investors watch. There are 50 diverse stocks from 13 areas of the economy. The index is known as the NIFTY 50.
Bombay Stock Exchange (BSE)
BSE (Bombay Stock Exchange) was set up in 1875. At that time, it was called The Native Share and Stock Broker’s Association. It is Asia’s first Stock exchange.
It currently lists about 5,000 companies on its index. It’s located in downtown Mumbai on Dalal Street and is the oldest stock exchange in Asia. The total market capitalization of BSE is around $1 trillion (USD). Worldwide, it also has the most number of companies listed on it. It is the eleventh largest stock exchange in the world in terms of market capitalization.
As the Dow Jones average in the United States, the BSE 30 Index is a primary market index. BSE 30 index is known as SENSEX. It is used both in India and Asia. The index measures trends from 30 powerhouse stocks traded on the BSE.
The BSE switched to an electronic trading system in 1995. This automated, screen-based trading platform is BSE Online Trading (BOLT). In addition, the BSE has also introduced a centralized exchange-based internet trading system that enables investors worldwide to trade on the BSE Platform.
The general market index is the broad-market index, consisting of the large, liquid stocks of the country. In India, BSE Sensex and NSE Nifty are the most famous indices. Sensex is a composition of 30 stocks, whereas Nifty has 50 stocks. In addition,sector-specific indices are used as a benchmark for comparing the returns of a stock portfolio related to that industry or a sector, e.g., Bank Nifty, Nifty IT, etc.
Functions of a Stock Exchange
Some of the main functions of a Stock Exchange are:-
Mobilization of Savings
Stock exchanges are organized and regulated market that protects the interests of investors and traders. This encourages small and big investors to invest in securities through the stock exchange. It thus provides a ready market for buying and selling securities.
Investors in securities are attracted due to good investment returns and capital appreciation. This attracts more investors to invest through the stock exchange. Corporates can also quickly raise funds by offering various types of securities to meet the needs of different investors. Thus a stock exchange serves as a tool for capital formation.
Pricing of Securities
The stock market helps value the securities based on demand and supply factors. Securities of profitable and growth-oriented companies are valued higher as there is more demand for such protection. The valuation of securities is helpful for investors, government, and creditors. Through this, investors can know the market value of their investment. It also enables the creditors to estimate the creditworthiness of a company.
A stock exchange is a reliable measurement of economic condition. Every significant change in a country and economy is reflected in the prices of shares. The rise or fall in the share prices indicates an economy’s boom or recession cycle. A stock exchange is also known as the pulse of an economy as it reflects the economic conditions.
Protects Investors’ Interests
A stock exchange protects the interest of investors. In the stock market, only the listed securities are traded. A stock exchange allows listing only after verifying the soundness of a company. In addition, companies listed must operate within the strict rules and regulations laid down by a stock exchange. This ensures the safety of dealing through a stock exchange.
The primary function of the stock market is to provide a ready market for the sale and purchase of securities. A stock market’s presence assures investors that their investment can be converted into cash whenever they want. Investors can invest in long-term investment projects without hesitation through a stock exchange; they can convert long-term investments into short-term and medium-term or even liquidate their assets whenever they want.
Contributes to Economic Growth
In the stock exchange, securities of various companies are bought and sold. As a result, investors invest in companies that give good returns on investments. Hence companies, too, try to invest in the most productive investment projects. This leads to capital formation as well as economic growth.
What are the Major Trading Segments in a Stock Exchange?
Stock exchanges both in India and globally offer to trade in the following segments: –
Equity Segment (Cash Market)
This is where various stocks are traded through exchanges. For example, in an equity segment, buyers and sellers sell securities that could be public company stock or private company stock. This is an essential part of a market economy.
There are two primary exchanges in India; NSE (National Stock Exchange) and BSE (Bombay Stock Exchange).
Derivative Segment (F&O Segment)
Derivative trading is contract-based trading between two or more parties, and a derivative contract is priced based on its underlying. Common assets in derivative trading are equity, commodities, currencies, etc. Traders usually use futures contracts to hedge their risks. The parties involved in the futures transaction are obligated to fulfill a commitment to buy or sell an underlying asset.
Derivative trading is a beneficial tool for traders as they provide a way to lock in prices and hedge risks in the spot market.
Wholesale Debt Market (WDM)
This offers the corporate and government debt trading platform. This segment provides trading facilities for a variety of debt instruments like;
1) Government Securities, Treasury Bills,
2) Bonds issued by Public Sector Undertakings, Corporates, Banks, etc., and
3) Securities issued by Financial Institutions, etc.
Large investors and a high average trade value characterize this segment. Until recently, the market was purely informal as most trades between two parties were negotiated.
In Commodity Markets, physical substances like gold, copper, crude oil, etc., are traded on a contract basis. Commodities could be an essential way to diversify a trader’s portfolio beyond traditional securities, either for the long term or as a place to park cash during unusually volatile or bearish stock markets. Most of the commodities move in a direction opposite to stocks.
Trading commodities at a stock exchange could be done through derivative instruments like Futures and Options. Futures are an agreement to buy or sell a commodity quantity at a fixed price at a later time. High leverage is provided with such a type of trading in commodities. However, futures could be precarious as leverage can magnify profit and losses during volatile markets.
Conclusion: Importance of Stock Exchange for Investors
The stock exchange is the marketplace that allows individuals and companies to buy and sell the shares of publicly traded companies and generate wealth. A stock market index acts as a barometer of an economy; it reflects the condition of an overall economy and different sectors and industries. Investors use this information in decision-making regarding their investment choices and strategies.