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.

History of stock exchanges

In India, the first organised stock exchange was the ‘Bombay Stock Exchange’ (BSE) founded in 1875 in Mumbai (then Bombay). The organisation stands tall as the oldest stock exchange in Asia. 

Soon, the ‘National Stock Exchange’ (NSE) and the ‘Over-the-Counter Exchange of India’ (OICEI) were launched in 1992 and 1990, respectively, to ensure safe stock trading across India. The NSE and OICEI are in Mumbai. Currently, there are twenty-three stock exchanges in India. Out of the total, BSE and NSE are national stock exchanges, while the remaining twenty-one is regional stock exchanges. 
 

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.

Role of stock exchanges in the economy

1.    Encourages business growth
Stock exchanges offer companies a fair chance to raise capital from the public. The funds pooled through Initial Public Offerings (IPOs) help companies to promote business expansion globally. Firms can list their shares on a stock exchange and request investments from people against company shares. 

2.    Facilitates safe investing
A stock exchange offers a robust infrastructure for stock investors across India. The platform allows traders to invest seamlessly in some of the biggest companies in the world. These centralised exchanges ensure safe and transparent trading for investors, where they can keep track of their stocks, profits, and market patterns. 

3.    Surge in investors
Stock investments carry risks for companies and investors. The Securities and Exchange Board of India governs the stock market and offers safety rights to investors. Stock exchanges work in sync with SEBI guidelines to provide complete protection to people willing to invest in stocks. The regulated framework encourages participation from different classes. 
 

How to buy and sell stocks on a stock exchange?

1.    When taking your first step in stock investing, you must seek the assistance of a trusted stockbroker. These service providers help you choose your preferred investment and guide you through the process. There are three categories of brokers: full-time, online, and Direct stock purchase plans. 
2.    Add funds to your offline or online brokerage account. You can link your bank account or make direct online fund transfers. After this, you can ask your broker to place a trade. 
3.    Stocks of different companies have unique ticker symbols. For instance, the ticker symbol of Apple Inc. is AAPL. 
4.    After selecting the ticker symbol, you find a price quote that provides information about the last traded price, a bid, and an offer. The bid shows the highest price you can fetch from the sale, whereas the offer depicts the lowest price a purchaser will pay for the stock. The difference between the bid and offer prices is called a spread. 
5.    The most common order type is a market order that ensures immediate execution of trade at the current market price. 
6.    Contrarily, a limit order allows you to fix the price at which you want to buy or sell the stock. If the stock price never reaches the set limit, the trade remains active until you cancel it. 
7.    In the case of day orders, the price limit remains effective until the end of the trading day. Those who want the order active for a brief span can easily choose the ‘immediate or cancel’ option by specifying it to the broker. The ‘good ’til cancelled’ option is good if you want the order to remain active for longer than a day. You can also choose the ‘stop-loss’ option. 
8.    On the completion of the trade, you will get a summary displaying the details of the orders. 

Benefits of Listing with Stock Exchange

1.    Raise capital
The main reason for stock listing on stock exchanges is to raise funds from the public. Companies can issue new share capital to support their growth and expansion. Share subscription provides sufficient fund flow to corporations to meet their financial needs. The money collected can help to pay off the companies' debts. The investor fund ensures the smooth functioning of the business entities. 

2.    Increased marketability and liquidity
Stock investments carry risk due to market fluctuations. However, many consider the shares listed on a stock exchange a reliable investment. These platforms are a hotbed for trading securities as they offer investors a safe, cost-effective, and easy-to-use infrastructure. The shares of a company become more marketable when listed on trusted stock exchanges. Investors can liquidate their shares as and when required.

3.    Increased brand presence
Listing of shares on stock exchanges creates brand awareness for companies. With IPOs, companies can capture the attention of ordinary people. Stock listing lets companies grab the public's attention without extra promotional investments. 
 

Benefits of investing in stocks through a stock exchange

1.    The Securities and Exchange Board of India regulates the stock exchanges in India. The watchdog keeps an eye on the working of stock markets to ensure the safety of investors. 
2.    Stock exchanges offer a diverse range of stock options of native and multinational companies to investors. These platforms help investors to build a strong portfolio featuring low-risk to high-risk investments. 
3.    Stock exchanges give investors access to an economical, transparent, and safe trading infrastructure.
4.    Through stock exchanges, investors can liquidate their shares at any time based on their convenience. 
5.    When investing via stock exchanges, investors do not have to worry about the theft of their funds. 
 

Risk of investing in stocks through a stock exchange

1.    The share market is highly volatile as the price changes vary with government policies, company policies, budgets, etc. Thus, investing in stocks through a stock exchange carries these risk elements with them. Investors should act prudently when locking their funds. 
2.    Stock exchange investors also face the repercussions of the rolling effect, where small investors follow the lead of big investors blindly. For instance, if big investors like Rakesh Jhunjunwala disinvest in a firm, small investors are likely to follow him. This leads to a price surge or a massive decrease in share prices. 
3.    Investment in stocks via stock exchanges requires the assistance of brokers who charge exorbitant fees for their guidance. 
 

Conclusion

Stock exchanges are known for their easy-to-use, secure, and transparent working mechanisms focused on investors. These platforms serve as a one-stop solution offering access to shares of various Indian and multinational companies. Investment through stock exchanges allows investors to work in a systematic cluster, understand the market patterns well, and thus expand their earnings. Firms list their shares on stock exchanges to raise capital for growth and expansion. These SEBI-regulated entities are a safe medium to fetch passive income through intelligent investments. However, investors must invest in trusted firms to ensure profitable income.