What is Stock Exchange?

The stock market plays a very important role in the growth and development of the economy. It is an important component of the capital market. The stock market is a place where corporate listed securities are purchased and sold.

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The stock market is an organised and regulated market, only securities that are listed within the stock exchange can be traded.

Stock exchange is also known as a secondary market or stock market or share bazar.

The term security is composed of equity shares, preference shares, debentures, government securities and bonds.

Mutual funds also play a crucial role in the growth and development of the stock market. Mutual fund companies have a pool of funds which they invest in the stock market in a certain proportion, by issuing the units of mutual fund at a certain NAV ( Net Asset Value). The NAV fluctuates as per the market conditions.

The stock exchange works as an intermediary between the investors and companies. The Securities And Exchange Board of India (SEBI) is the regulator of the capital markets in India.

Stock exchange is also known as a pulse of economy or economic mirror as it reflects the economic conditions prevailing in a country.

Brokers play an integral part in the trading system of the stock market, as all orders are placed through them.

According to the securities contracts regulation Act 1956, the term stock exchange is defined as, “An association, organisation or body of individuals, whether incorporated or not, established for the purpose of assisting, regulating and controlling of business in buying, selling and dealing in security”.

Husband and Dockerary have defined stock exchange as:“Stock exchanges are privately organised market which are used to facilitate trading in securities”.

Characteristics:

Securities market: The stock market is a place where various financial securities are bought and sold.
Stringent rules: All the listed companies have to strictly comply to SEBI guidelines and rules and regulations laid down by the stock exchange.
Members only: Securities traded on the stock markets can only be executed by the members of the exchange on their own or through authorised brokers.
Convenient: Now-a-days all trading activities are done electronicly on the stock exchange.

Functions:

What does the stock market do?

Channel For Savings: Stock markets are designed in a way to protect and promote the interests of the investors. Stock markets are organised and regulated. This motivates investors to invest in the securities market.
Corpus Creation: Investment in the securities market for a significant timeline renders attractive returns to the investors and leads to capital appreciation. The corporate sector raises finance through the Stock exchange by issuing various financial securities like equity shares, preference shares, debentures, bonds, etc.
Optimum Utilisation: The idle funds in the hands of individuals are not effectively used in the economy. Stock exchange facilities effective allocation of funds to productive and profitable channels.
Economic Indicator: The stock market is an effective Indicator and reflector of the economy. Various forecasts and estimates can be drawn by analysing the market conditions prevalent. The fluctuations in the share prices indicates the boom or recession cycle of the economy. It is the pulse of the economy or economic mirror as it exactly reflects the prevailing economy.
Liquidity of Cash: The stock market facilities liquidity of cash, the money invested in the stock market can be converted into cash at anytime. Long term investments can be made unhesitantly, as it can be liquidated quickly.
Economic Development: Stock markets covert savings into investments. Business entities make use of investor funds to take up production or commercial activities thereby, leading to economic development. It transfers real economic resources from lenders to borrowers, which inturn are used for productive activities.
Fair Valuation: The prices of these securities are derived from the mechanism of effective demand and supply forces. The investors supply the funds and the business entities utilize. The securities of profitable and fundamentally strong companies are valued higher due to strong demand forces. Fair Valuation helps the creditors to estimate the credit worthiness of the organisation.
Investor Oriented: Stock markets are designed in the way to protect and promote the interests of the investors. Companies have to strictly comply to the rules and regulations made by the SEBI Act and the stock exchange. Stock exchange allows listing only after verifying the soundness of the company. Companies listed, have to operate within the framework provided by the stock exchange and the SEBI ( The Securities and Exchange Board of India) which ensures atmost safety of the investors’ funds.
Intermediary: The stock markets act as a link between the company and the investors. It routes finance from savers to entrepreneurial borrowers.
Collaborates with: The stock markets associate with various intermediaries like brokers, underwriters, merchant bankers, collection bankers. They play an important role in the smooth functioning of the entire system.
Investors: The stock markets have a wide range of investors. It consists of both the individual and the institutional type (Mutual Funds) of investors.

Major Stock Exchanges in India:

1. The Bombay Stock Exchange:

BSE stands for The Bombay Stock Exchange. The Bombay Stock Exchange (BSE) was founded on 9 July 1875 by cotton merchant Premchand Roychand. Back in the day it was called as “The Native Share and Stock Broker’s Association”. It is the first and the oldest stock exchange in Asia, located in Dalal Street in Mumbai. It works under the SEBI’s framework and guidelines, which ensures, investor protection, legal compliance, fair trading practices.

2. The National Stock Exchange:

NSE stands for The National Stock Exchange. The National Stock Exchange was founded by a group of leading Indian Financial Institutions in 1992. It started trading activities in 1994. It is one of the leading stock exchanges in India, based in Mumbai. The NSE is the largest and most modern stock exchange in India. It is the first dematerialised stock exchange in India, which facilitates electronic trading stytem and offers easy and convenient trading facility to the investors. The NIFTY (National Stock Exchange Fifty) is the main index of NSE.

Investment Methods:

Primary Market :

Investors can make investments through the primary market by subscribing to the new issues. In the primary market, companies issue their financial securities for the first time to raise finance. It is also known as the New Issue Market. For Example, Initial Public Offer, Further Public Offer.

Secondary Market:

In the secondary market previously issued financial securities are traded. It is known as the stock exchange or the stock market. After the issue of IPO, these securities are traded in the secondary market.

The primary difference between the primary market and secondary market is that, in the primary market only new securites are issued, on the contrary, in the secondary market the previously issued securites are traded.

Why should one make investments in the stock market?

To get the benefit of compounding by long term investment.
To generate high returns in the long run.
To channelise idle savings to effective and profitable avenues.
To facilitate effective capital appreciation in a significant tenure.
To generate income by the way of dividends.
To make productive and optimum use of idle funds.
To take advantage of the liquidity of the markets, the investors can convert the long term securities to short term whenever required.
To participate in the management of the organisation and contribute towards the growth and development of the nation.
To facilitate the habit of saving and investing.
The stock markets are organised and regulated, it protects and promotes the investors’ interests.
Stock exchange allows listing only after verifying the soundness of the company.
The securities listed, have to operate within the framework provided by the stock exchange and the SEBI ( The Securities and Exchange Board of India) which ensures atmost safety of the investors’ funds.

DISCLAIMER:

Investment in securities market are subject to market risks, read all the related documents carefully before investing.

The information presented on this website is with the objective of imparting financial knowledge and for informational purposes only, not a substitute for any professional financial advise.

We have made sure to provide information with atmost accuracy. Regardless of anything, financial information imparted through this website should not be considered as an offer to make investment decisions.

You must consult a qualified financial advisor before making any actual investment.

What Is A Stock Market? Meaning, Characteristics, Functions- The Ultimate Guide