Stock exchanges : The money marketplace

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Stock exchanges are the beating heart of the financial world. Millions of shares change hands daily on these exchanges, companies turn to them to raise money, and people use them to invest their savings, hoping to build wealth. Whether you have heard of the BSE, NSE, or the New York Stock Exchange (NYSE), they all serve the same purpose: connecting buyers with sellers in a fair, regulated way.

This guide explores stock exchanges, how they function behind the scenes, and why they matter to companies and investors. Understanding stock exchanges is the first step to understanding the financial markets, even for those new to investing.

What is a stock exchange?

A stock exchange is a marketplace where buyers and sellers trade shares and other financial instruments. It provides a platform where companies list their shares so that investors can buy ownership stakes in these businesses. Think of it as an organised marketplace, but instead of physical goods, financial securities are bought and sold.

In the past, stock exchanges resembled busy marketplaces with traders shouting prices and making deals face-to-face. Today, thanks to digitisation, all trading occurs electronically through computerised systems.

Key features of stock exchanges

Centralised trading: They provide a single location (now virtual) where all trading activities take place
Price discovery: They help determine the market price of securities through supply and demand
Regulatory oversight: They operate under strict rules to ensure fair and transparent trading
Information dissemination: They publish real-time price information and market data
Liquidity: They create a marketplace where securities can be easily bought and sold
Capital formation: They enable companies to raise funds by issuing securities
Investor protection: They implement safeguards to protect investor interests
Market efficiency: They facilitate the quick execution of trades at fair prices

How does a stock exchange work?

The functioning of a stock exchange is straightforward in principle:

The order matching process

When you want to buy or sell a stock, you place an order through your broker's platform. The stock exchange's computerised system then looks for a matching order at your specified price. Once a match is found, the trade is executed almost instantly.

Price determination

Stock prices on an exchange fluctuate continuously throughout the trading day, driven by the basic economic principle of supply and demand:

When more people want to buy a stock than sell it, the price rises
When more people want to sell than buy, the price falls

For example, if a company announces positive news like a new product or strong earnings, investors may rush to buy its shares, pushing the price up. Conversely, if there's negative news or economic uncertainty, more investors might sell, causing the price to drop.

Trading sessions and mechanisms

Indian stock exchanges operate on specific timelines with distinct sessions:

Pre-opening session (9:00 AM - 9:15 AM): Orders can be placed but not executed; used to determine opening prices
Normal trading session (9:15 AM - 3:30 PM): Regular trading hours when most activity occurs
Closing session (3:30 PM - 4:00 PM): Used for specific institutional trades and determining closing prices

Stock exchanges also implement various trading mechanisms:

Circuit breakers: Temporary halts in trading when prices move beyond predefined limits
Call auctions: Used in illiquid stocks or during special circumstances where orders are collected and matched at specific intervals
Block deals: Large trades executed in special windows to minimise market impact

Major stock exchanges in India

India has two primary stock exchanges where most trading takes place:

Bombay Stock Exchange (BSE)

Established in 1875 on Dalal Street in Mumbai
Asia's oldest stock exchange
Over 5,000 listed companies
Market capitalisation of approximately 460 lakh crore rupees
Benchmark index: SENSEX (tracks top 30 companies)

National Stock Exchange (NSE)

Founded in 1992
Over 2,000 listed companies
Market capitalisation of about 455.88 lakh crore rupees
Benchmark index: NIFTY 50 (tracks top 50 companies)

Other important exchanges

Indian International Exchange (INX): India's first international exchange, located at GIFT City, Gujarat
Multi-Commodity Exchange (MCX): India's largest commodity derivatives exchange
National Commodity and Derivatives Exchange (NCDEX): Specialises in agricultural commodities
NSE International Financial Service Centre (NSE IFSC): Located in GIFT City for international investors
Calcutta Stock Exchange (CSE): One of India's oldest exchanges, though with reduced activity
Metropolitan Stock Exchange (MSE): Formerly MCX Stock Exchange, focusing on new financial products

The role of market indices

Stock market indices serve as barometers of market performance and economic health:

SENSEX (BSE)

Tracks 30 financially sound, large, and actively traded stocks
Calculated using the free-float market capitalisation method
Represents about 45% of the total market capitalisation on BSE

NIFTY 50 (NSE)

Includes 50 of the largest and most liquid Indian companies
Covers major sectors of the Indian economy
Used as a benchmark for investment products like index funds and ETFs

The regulatory framework

Stock exchanges don't operate in isolation; they function within a comprehensive regulatory framework to ensure fair and transparent trading:

Securities and Exchange Board of India (SEBI)

SEBI serves as the primary regulatory authority for India's stock market and investment sector:

Investor protection: Implements safeguards to protect investor interests and rights
Market supervision: Prevents fraudulent activities like insider trading and market manipulation
Regulatory enforcement: Creates and enforces regulations for fair market operations
Market development: Works to improve market infrastructure and practices

Other regulatory bodies

Reserve Bank of India (RBI): Regulates monetary policy affecting capital markets
Ministry of Finance: Oversees the broader financial sector policies

Benefits of exchange-based trading

Stock exchanges offer several advantages over unorganised trading systems:

Transparency: Public price discovery and equal access to information
Liquidity: Ability to buy and sell securities quickly at fair prices
Investor protection: Regulatory oversight and safeguards against fraud
Efficiency: Standardised processes and electronic execution
Security: Reduced counterparty risk through clearing houses

Stock exchanges are a vital component of the financial ecosystem. They provide a regulated environment where companies can raise capital and investors can buy and sell securities. Understanding how they function is essential for anyone interested in investing in the stock market.

Whether planning to invest for long-term wealth building or engaging in more active trading, familiarising oneself with stock exchanges is a crucial first step in the investment journey.