What is a stock exchange?

Introduction

India is a booming economy poised to become the third largest in the world by 2025. The economic growth for the years 2022-23 is 7.7 percent of the GDP (Gross domestic product), currently one of the highest in the world. The Sensex Index has crossed the 60,000 mark, the highest since its establishment, and is poised to reach dizzying heights. It indicates economic growth and the rising number denotes that businesses are growing and people are investing in this growth.

During and after COVID-19, the number of investors in the stock market witnessed exponential growth as investors saw lucrative returns. Due to the uncertainty of the general economic conditions, many working individuals have started saving more by investing in the stock market for long-term returns. The discussion about stocks, portfolios, and investments has become regular among colleagues, friends, and family. In such a scenario, it becomes important to know the basics related to the stock market.

This article elaborates on the stock exchange definition, the major stock exchanges in India, and what are the functions of a stock exchange.

What is a stock exchange?

According to the stock exchange meaning, it is a marketplace where buyers and sellers come together to trade financial instruments. These financial instruments can be stocks, bonds, and other tradable instruments. The buyers and sellers could be individuals, investors, businesses, financial institutions, other entities, or governments. The transactions take place under the vigilance of a SEBI – Securities and Exchange Board of India, the regulator of the capital market in India. The stocks traded on the stock exchange must be listed on it.

Major stock exchanges in India

India's two major stock exchanges are the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).

The National Stock Exchange (NSE)

The NSE was incorporated in 1992 and recognized as a stock exchange by SEBI in 1994. A group of leading financial institutions set it up at the behest of the Indian Government to bring about transparency to the Indian capital market. Under the SEBI supervision, it separated ownership and management of the exchange and allowed anyone who met the minimum qualification, experience, and financial criteria to trade.  It democratized trading by allowing any citizen to be a member and introduced an electronic trading system connecting the entire country’s investor base.

A robust risk management system ensured investor protection against broker monopoly. The NSDL (National Securities Depository Limited) allows investors to hold and transfer shares in the dematerialised format, eliminating forgery, fraud, and fake transactions. The exchange has 2500 VSATs and 3000 leased lines spread over 2000 cities in India that facilitate seamless online trade.

The Bombay Stock Exchange (BSE)

The Bombay Stock Exchange (BSE) is the oldest in Asia. It had humble beginnings when five stockbrokers started trading under a tree in the 1850s. The number of investors increased, forcing it to shift its location to Dalal Street in 1874. Premchand Royachand founded The Native Share and Stock Brokers Association in 1875, which was later renamed as Bombay Stock Exchange (BSE).  On 31^st August 1957, the BSE became the first Stock Exchange recognised by the Indian government. It is India’s largest and oldest securities market.

The BSE Sensex is a compilation of 30 stocks representing large, financially stable, and profitable companies across industries. It is indicative of the performance of these companies, which in turn indicates the health of the Indian economy.

How do stock exchanges work?

When a company wants to raise capital, it offers its shares to the public. Shares are parts of the company which an investor can buy and own a small percentage of the company depending on the value of the share and the number of shares they buy.

The company offers its shares through an IPO – Initial Public Offering. All this happens in the ‘Primary Market’. After the company floats its shares in the primary market, those who bought them in the primary market can trade or sell them in the ‘Secondary market.’ The stock market or stock exchange is the secondary market.

The stocks or shares of a company are bought or sold by traders to earn a profit. The price of the shares keeps fluctuating depending on the factors like the company’s profit, business performance, and the market sentiment about that company. Accordingly, shares are bought or sold depending on their perceived profitability.

The sellers have a selling price for a share, and the buyers offer a buying price for it. If the two coincide, then a trade occurs. Millions of investors are making multiple transactions simultaneously on the stock market. Hence, there is a change in the share price every minute. In today’s age, all these transactions occur electronically on the portal provided by a broker. A broker acts as a middleman for the parties involved. They carry out the requests of the buyers and sellers and later settle the trade for a commission or a fee.

What is the purpose of the stock exchange?

All these transactions occur in the stock exchange. The stock exchange is the secondary market, meaning that the transactions do not occur directly with the said company. Instead, they occur with the investors who bought the shares during the IPO in the primary market.