Stock Exchange in India - Functions, What Is It, Meaning, & Types
Just as you would visit the local market to get your daily necessities, you need to visit the stock exchange to buy financial instruments like stocks, commodities, or bonds. Let's find out more about the stock exchange in the next section.
Stock Exchange- A Brief
If you want to buy any financial instrument in India, you would have to visit the stock exchange in India. This online market is open for a fixed number of hours from Monday to Friday.
You can only trade in shares of listed companies on the stock exchange. There are stocks that you won't find in a reputed stock exchange. Such stocks can be found in the OTC or over-the-counter market. You may purchase such shares, but it would be a high-risk investment.
The stock exchange plays a vital role since it provides ease of transactions between buyers and sellers of shares. To ensure the safety of investments made in the stock exchange in India, it is regulated by SEBI or the Securities Exchange Board of India. The goal of SEBI is the protection of investor interests.
Now that you know what a stock exchange is, let's take a look at how the stock exchange functions.
Functioning of the Stock Exchange
There are no specialists or market makers to decide the functioning of the stock exchange in India. It functions independently. Trading takes place based on orders, and trades are executed through an electronic order limit book.
The sell order and buy order are matched automatically through a trading order in the stock exchange. Since all financial transactions take place through this order-driven format, all orders can be seen publicly, and there is great transparency.
Remember, you cannot directly place an order for securities on the stock exchange. You need to place a buy or sell order through a registered broker, which could be a bank or a financial institution. A broker is an intermediary between you (the investor) and the stock market.
The stock exchange has both retail or individual investors and institutional investors like mutual funds. Everyone has DMA or direct market access benefits. Brokers provide trading terminals to investors for placing orders directly.
Next, let's find out why companies should get listed on the stock exchange.
Why Should You List Your Company on the Stock Exchange?
Companies that list on the stock exchange enjoy lots of privileges. Here are some benefits that a listed company can get:
Companies listed on the stock exchange have higher credibility and are trusted by investors. For this reason, they have a higher value. Such companies are able to issue more shares to shareholders and increase the shareholding base.
Access to Capital
Listed companies can issue shares and access cheap capital from shareholders. Not only can companies avail of cheap capital, but they can also get more capital due to their credibility as a listed company. It helps your company scale operations and stay afloat.
Used As Collateral
Shares of a company listed on the stock exchange can be used as collateral against loans. Not only can you get a loan, but it is processed faster, and you also have a higher loan limit.
Investors who have listed stocks enjoy greater liquidity compared to OTC stocks. You can get the latest market value of your share listed on the stock exchange at any time and find out what your investments are worth. When the company's earnings go up, so does your income since you get dividends apart from capital appreciation.
Fair Market Price
There is a correlation between the real value of the security and the price it is listed at on the stock exchange. The demand and supply of securities impact their price; since they are publicly disclosed, investors can expect to get this price on sale.
Next, let's find out what market you should invest in.
What Market Should You Invest In?
There are two different markets you can invest in. They are:
When a company issues shares to individual and institutional investors, it's known as an IPO (Initial Public Offer). If you want to buy shares of a company that is issuing its shares for the first time, you will invest in the primary market. The shares of such companies are listed on the stock exchange for the first time after the IPO.
Once a company has been listed on the stock exchange, you need to invest in the secondary market to buy shares of such companies. Unlike the primary market, where you may or may not get all the shares you applied for, you can decide the number of shares (lots) you need to buy and invest accordingly.
Now that you know how stock exchanges work and the different types of markets, let's find out how many stock exchanges there are in India.
How Many Stock Exchanges Are There in India?
There are two major stock exchanges in India. They are:
Bombay Stock Exchange
Established in 1875, the Bombay Stock Exchange is the oldest in Asia. It also ranks 10th globally in terms of transactions. The market capitalization (total number of shares x market price) for BSE in November 2022 is almost $ 3.5 trillion, and the total number of publicly listed companies is 5295. The Sensex measures the performance of the BSE (has the top 30 stocks of the BSE), and today the Sensex is 63,000.
National Stock Exchange
To challenge the monopoly of the BSE, the NSE, or the National Stock Exchange, was launched in 1992. The market cap of NSE is $3.4 trillion, making it the 9th largest stock exchange globally. Investors globally use the NSE performance to understand India's stock market's health.
There is a strong correlation between stock markets globally, so if BSE falls, it is because other major global indices have fallen.
The stock exchange makes it easy for investors to become owners of companies listed on it. You can create wealth over the long term by choosing the right company.
Why Do We Need the Stock Exchange?
There are several essential functions that a stock exchange performs. They are:
- Cheap Capital for companies: The stock exchange provides companies with access to cheap capital.
- Liquidity to Investors: Investors can buy and sell shares and commodities at any time and get the prevailing market value.
- Wealth Creation for Investors: When investors buy a good stock and hold it long-term, they create wealth. The benefits of holding a stock for 10 years or more is income through dividend, growth through bonus and right shares, and wealth creation through higher market value.
How Can You Invest in Stock Markets?
You cannot invest directly in the stock exchange; you need to go through a broker. The first step is to open a Demat account with a bank or a broking firm and a trading account. When you place a buy order, money goes from your bank to the Demat account. The money is transferred to your bank account when you sell a share.
When Do You Need to Apply for a Share?
When you want to buy shares issued through an IPO, you must apply for them- you may or may not be allotted all the shares you apply for.
What are the two Major Stock Exchanges Where you can Invest in Shares?
You can invest in shares in India through the BSE and the NSE.