National Stock Exchange: Meaning, History, Functions, Benefits and More

A stock exchange is a bourse that facilitates buying and selling of shares between traders in the secondary market. It is like a marketplace where the stocks issued by companies can be freely traded. In India, we have two major stock exchanges, namely the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). In this article, we’ll take a closer look at the NSE, its history, its functions and why it is necessary for the Indian stock market. 

What is the NSE? 

Headquartered in Mumbai, India, the National Stock Exchange (NSE) is the leading stock exchange in India, offering transaction support in the equity, wholesale debt and derivative market segments. It is also one of the largest stock exchanges in the world in terms of market capitalization, the largest derivatives exchange globally in terms of the number of contracts bought and sold, and the third largest exchange in the cash equities segment in terms of the number of trades executed. 

The NSE’s flagship index is the Nifty, also known as the Nifty 50. Short for National Fifty, the Nifty consists of the top 50 stocks trading on the NSE by stock exchange. In addition to the Nifty 50, the NSE’s portfolio of indices also includes the following:

• Other broad market indices like Nifty Next 50, Nifty 100, Nifty 500 and more
• Sectoral indices like Nifty Bank, Nifty Auto, Nifty FMCG and more
• Strategy indices like Nifty Dividend Opportunities 50, Nifty Growth Sectors 15 and more
• Thematic indices like Nifty Commodities, Nifty MNC, Nifty PSE and more

The History of the National Stock Exchange

The NSE was incorporated in 1992, recognised as a stock exchange by the Securities and Exchange Board of India in 1993, and commenced its operations in 1994. The Pherwani Committee’s recommendations played a pivotal role in establishing the National Stock Exchange in India. 

Trading in the wholesale debt market was the first segment to be launched on the exchange. This was then quickly followed by the launch of trading in the cash market segment. In terms of the trading mechanisms supported, the National Stock Exchange was the first modern and completely automated platform in the country. Although the Bombay Stock Exchange (BSE) was established before the National Stock Exchange (NSE), it was the latter that pioneered electronic, screen-based trading in the country. 

The establishment of the NSE was also a turning point in the trading history of the Indian financial markets because it made trading accessible to everybody. Instead of memberships being restricted to brokers alone, anybody who met the NSE’s minimum qualifications was allowed to trade. 

A Closer Look at How Trading on the NSE Works

Trades are executed through the National Stock Exchange as per the electronic limit order method, as per which the NSE maintains an electronic record of all the buy and sell limit orders placed for any instrument that is listed on the exchange. This kind of record-keeping makes it easier to match buy and sell orders and execute trades via the exchange. 

Order matching is done by automated computer terminals, eliminating the need for human intervention of any sort. This makes trading on the NSE quick, hassle-free and transparent. Orders that are not immediately matched are typically added to a list with a timestamp each. And when an order of the opposite category (buy for sell and vice versa) is placed, matching orders from the list with the earliest timestamps are executed — followed by those with later timestamps.  

Functions of the National Stock Exchange 

The role of the National Stock Exchange in India’s financial markets is significant in many ways. Here is a closer look at the key functions of the NSE in India. 

• To offer investors equal opportunities to participate in the financial markets 
• To establish a nationwide trading platform for assets in the debt, cash and equity segments 
• To ensure that the electronic trading systems used to execute trades are fair, transparent and efficient 
• To facilitate quick trade settlement 
• To match the trading standards prevailing in international securities markets 

NSE Market Segments

The National Stock Exchange supports trading in three different market segments. These segments along with the products and trading activities that fall within each of them are listed below. 

1. Equities

• Equity trading
• Indices
• Exchange Traded Funds (ETFs)
• Mutual funds
• Sovereign Gold Bonds (SGBs)
• Initial Public Offering (IPO)
• Offer for Sale (OFS)
• Institutional Placement Program (IPP)

2. Derivatives

• Equity derivatives
• Currency derivatives
• Commodity derivatives
• Interest rate derivatives

3. Debt and Fixed Income

• Corporate bonds
• Electronic Debt Bidding Platform (EBP)
• Non-competitive bidding in G-Secs (government securities)
• Tri-party repo
•  Negotiated trade reporting platform

Benefits of Listing Stocks and Securities on the National Stock Exchange

Listing the stocks of companies on the National Stock Exchange in India has several advantages for the company as well as for investors and traders. Let’s take a closer look at these advantages. 

Easy Access to Capital

By listing their stocks and securities on a renowned exchange the National Stock Exchange (NSE), companies gain access to a vast pool of potential investors. This allows them to raise capital by selling shares to the public and provides an avenue to secure funds for business expansion, development, acquisitions and other business initiatives. 

Greater Liquidity

Liquidity refers to the ease with which stocks can be bought or sold in the market without causing a significant impact on the stock's price. Listing on the NSE also significantly enhances the liquidity of a company's shares, thanks to the large number of investors trading on the NSE. As a result, there is a higher volume of trading activity, leading to a deeper market for the company's shares. 

Improved Visibility and Credibility 

The National Stock Exchange has strict listing criteria and is one of the premier stock exchanges in India. Being listed on this exchange thus enhances a company's credibility and reputation among investors, analysts and potential business partners, thereby attracting more positive attention and interest. It also offers a platform for companies to showcase their financial performance, growth prospects and corporate governance practices to a broader range of investors and stakeholders. 

Easier Price Determination

By listing their shares on the National Stock Exchange, companies can ensure that they are traded in a transparent and regulated environment. The exchange operates with an efficient price discovery mechanism that helps determine the fair value of the shares based on market demand and supply dynamics. 

• Exit Strategy for Early Investors

For early-stage investors like venture capitalists, promoters and angel investors, an NSE listing offers an efficient exit strategy. These early investors can sell their shares in the secondary market once the company goes public and the shares are listed. This provides an opportunity for them to realize their investments and obtain liquidity for their holdings. 

Transparency in Trading

As a regulated exchange, the NSE enforces strict compliance and disclosure requirements for all companies whose shares are listed on the bourse. This promotes transparency in trading, ensuring that investors have access to accurate and timely information about the company's financial performance, business activities and other material developments. Transparent trading also fosters trust and confidence in the market, attracting both domestic and international investors who seek trustworthy investment opportunities.

Conclusion 

This sums up the key details every investor and trader needs to know about the National Stock Exchange. Now that you are aware of all that you need to know about the National Stock Exchange, you can get more clarity about how the financial markets in the country work. You can buy and sell shares on the NSE or the BSE once you open a Demat account with a registered Depository Participant (DP) and a trading account with a stockbroker. What’s more, you can also buy shares on the BSE and sell them on the NSE, and vice versa.