What is Stock Exchange?
A stock exchange is an electronic marketplace where the shares of different public companies are listed and actively traded among investors. It essentially acts as an intermediary between those who wish to purchase shares and those who wish to sell them.
Stock exchanges provide investors with a centralized and highly regulated environment where they can buy and sell shares of companies as well as other financial securities such as equity derivative contracts and debt instruments.
Two major stock exchanges in India are currently operational: the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). Some popular examples of stock exchanges outside India are the New York Stock Exchange (NYSE), NASDAQ, the London Stock Exchange (LSE), and the Tokyo Stock Exchange (TSE).
If you plan to purchase and sell shares of listed companies, understanding how a stock exchange works is crucial. Here is a quick overview of how a typical stock exchange in India operates.
A company that has decided to go public will first issue an Initial Public Offering (IPO). Once the IPO process is complete and the company’s shares are issued to the applicants, the company is then listed on a stock exchange like the Bombay Stock Exchange or the National Stock Exchange. Upon listing, investors can freely purchase and sell shares of the company among themselves without the involvement of the entity.
Imagine an investor who wishes to purchase 100 shares of a listed company. They place a buy order for 100 shares at a price of Rs. 100 per share through their stockbroker’s trading portal. The broker forwards the details of the buy order to the chosen stock exchange.
The exchange then matches the buy order with a corresponding sell order for the same price of Rs. 100 per share. If the prices match, the exchange executes the trade and notifies the brokers of both the buyer and the seller.
A typical stock exchange in India has several defining features. These features are designed to ensure fairness, efficiency, and stability while trading. Let us quickly go through some of the essential features.
The constant interaction between buyers and sellers on a stock exchange enables the market to determine the fair value of securities easily. Efficient price discovery also helps in the proper allocation of capital across the economy.
By providing investors with a platform to quickly purchase and sell securities, a stock exchange infuses liquidity in the counter. High levels of liquidity are crucial for the smooth functioning of financial markets, as they allow investors to enter or exit positions with minimal impact on prices.
A stock exchange ensures transparency by disseminating real-time trading information to all investors. These include prices, volumes, and order book data. Such high levels of transparency help investors make informed investment decisions.
Another major feature of a stock exchange is the regulatory oversight. The Securities and Exchange Board of India (SEBI) is the authority overseeing the activities of all stock exchanges in India. SEBI ensures that exchanges enforce rules and regulations that protect investors and maintain market integrity.
Stock exchanges play a multifaceted role in the financial ecosystem. Let us delve into the primary functions that solidify the role of stock exchanges in modern financial systems.
Stock exchanges offer a wide range of investment opportunities for investors. By providing access to diverse securities, exchanges allow investors to build portfolios that match their risk tolerance and financial goals.
Exchanges play a significant role in promoting good corporate governance practices. Through stringent listing requirements and compliance standards, they encourage companies to maintain transparency, accountability, and ethical business practices.
Stock exchanges often serve as indicators of economic health. The performance of major stock indices, such as those of the Bombay Stock Exchange (Sensex) and the National Stock Exchange (Nifty) is frequently used to determine the overall economic condition of India.
A company can greatly benefit by listing itself on a stock exchange. Here is a quick overview of some of the key advantages that it gets to enjoy.
Listing on a stock exchange provides companies with easier access to a large pool of capital, which is necessary to fund growth initiatives and strengthen their financial position.
Companies that are listed on a stock exchange generally tend to enjoy higher visibility and credibility compared to privately held entities. This can help them grow their business opportunities and partnerships.
Purchasing and selling shares of listed entities is far easier compared to trading in unlisted shares. The enhanced liquidity can be beneficial for both investors as well as promoters of companies.
Listing on a stock exchange may also improve a company’s ability to attract and retain top talent by providing equity or equity-based compensation.
Stock exchanges are the backbone of the financial markets. They provide a regulated platform for companies to raise capital and for investors to participate in wealth creation. Through their various functions and features, stock exchanges contribute to price discovery, market efficiency, and economic development.
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