Stock Exchange - What Is a Stock Exchange? | Types, Definition & Explanation (2024)

Stock Exchange marketis a vital component of a stock market. It facilitates the transaction between traders of financial instruments and targeted buyers. Astock exchange in Indiaadheres to a set of rules and regulations directed by Securities and Exchange Board of India or SEBI. The said authoritative body functions to protect the interest of investors and aims to promote the stock market of India.

What is the Stock Exchange?

Thestock exchange in Indiaserves as a market where financial instruments like stocks, bonds and commodities are traded.

It is a platform where buyers and sellers come together to trade financial tools during specific hours of any business day while adhering to SEBI’s well-defined guidelines. However, only those companies who are listed in astock exchangeare allowed to trade in it.

Stocks which are not listed on a reputed stock exchange can still be traded in an ‘Over The Counter Market’. But such shares would not be held high in esteem in thestock exchange market.

How Does it Work?

Mostly, astock exchange in Indiaworks independently as no ‘market makers’ or ‘specialists’ are present in them.

The entire process of trading instock exchange in Indiais order-driven and is conducted over an electronic limit order book.

In such a set-up, orders are automatically matched with the help of the trading computer. It functions to match investors’ market orders with the most suitable limit orders.

The major benefit of such an order-driven market is that it facilitates transparency in transactions by displaying all market orders publicly.

Brokers play a vital role in the trading system of thestock exchange market,as all orders are placed through them.

Both institutional investors and retail customers can avail the benefits associated with direct market access or DMA. By using the trading terminals provided bystock exchange marketbrokers, investors can place their orders directly into the trading system.

Benefits of Listing with Stock Exchange

Listing with astock exchangeextends special privileges to company securities. For instance, only listed company shares are quoted on astock exchange.

Being listed on a reputed stock exchange is deemed beneficial for companies, investors and the public in general and they tend to benefit in these following ways –

• Increased Value

Only stocks listed with a reputable stock exchange are considered to be higher in value. Companies can cash in on their market reputation in thestock exchange marketby increasing their number of shareholders. Issuing shares in the market for shareholders to acquire is a potent way of increasing shareholder base and base, which in turn increases their credibility.

• Accessing capital

One of the most effective ways of availing cheap capital for a company is by issuing company shares in thestock exchange marketfor shareholders to acquire. Listed companies can generate comparatively more capital through share issuance owing to their repute in astock exchange marketand use it to keep their company afloat and its operations running.

• Collateral value

Almost all lenders accept listed securities as collateral and extend credit facilities against them. A listed company is more likely to avail a faster approval for their credit request; as they are deemed more credible in thestock exchange market.

• Liquidity

Listing helps shareholder avail the advantage of liquidity better than other counterparts and offers them ready marketability. It allows shareholders to estimate the value of investment owned by them.

Additionally, it permits share transactions with a company and helps them to even out the associated risks. It also helps shareholders to improve their earnings from even the slightest increase in overall organisational value.

• Fair price

The quoted price also tends to represent the real value of a particular security in astock exchange in India.

The fact that the prices of listed securities are set as per the forces of demand and supply and are disclosed publicly, investors are assured to acquire them at a fair price.

Investment Methods

Investors can invest in astock exchange of Indiathrough these two ways –

1. Primary market– This market creates securities and acts as a platform where firms float their new stock options and bonds for the general public to acquire. It is where companies enlist their shares for the first time.
2. Secondary market– The secondary market is also known as the stock market; it acts as a trading platform for investors. Here, investors trade in securities without involving the companies who issued them in the first place with the help of brokers. This market is further broken down into – auction market and dealer market.

Major stock exchanges in India

There are two majortypes of Stock Exchangesin India, namely the –

Bombay Stock Exchange (BSE):This particular stock exchange was established in 1875 in Mumbai at Dalal Street. It renowned as the oldest stock exchange not just in Asia and is the ‘World’s 10th largest Stock Exchange’.

The estimated market capitalisation of Bombay Stock Exchange as of April stands at $ 4.9 Trillion and has around 6000 companies publicly listed under it. The performance of BSE is measured by the Sensex, and it reached its all-time high in June in 2019, when it touched 40312.07.

National Stock Exchange (NSE):The NSE was established in 1992 in Mumbai and is accredited as the pioneer among the demutualised electronicstock exchangemarkets in India. Thisstock exchange marketwas established with the objective to eliminate the monopolistic impact of the Bombay Stock exchange in the Indian stock market.

The estimated market capitalisation of National Stock Exchange as of March 2016 was US$ 4.1 trillion and was acclaimed as the 12th largeststock exchangein the world. NIFTY 50 is NSE’s index, and it is extensively used by investors across the globe to gauge the performance of the Indian capital market.

Here is alist of stock exchanges in India

Being a vital part of the Indian stock market, astock exchange in Indiatends to influence the country’s financial sector to a great extent. Their collective performances happen to be a deciding factor of economic growth.

Also, all majortypes of stock exchangesare closely integrated with each other; if one majorstock exchangefalls, it will have a ripple effect on all other major exchanges across the globe.

For example, if the index of BombayStock Exchangefalls, its effect will be felt across stock exchanges like New York Stock Exchange, Tokyo Stock Exchange, Shanghai Stock Exchange, etc. as well.