What is Stock Exchange? Functions, Characteristics, Advantages

  • Post last modified:21/02/2022
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What is Stock Exchange?

The stock exchange is the term commonly used for a secondary market, which provides a place where different types of existing securities such as shares, debentures and bonds, government securities can be bought and sold on a regular basis.

Stock Exchange is also known as Stock Market or Share Market.

Table of Contents

A stock exchange is generally organized as an association, a society or a company with a limited number of members. It is open only to these members who act as brokers for the buyers and sellers.

The Securities Contract (Regulation) Act, 1956 [SCRA] defines Stock Exchange’ as anybody of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities.


Features of Stock Exchange

Features of stock exchange are:

Association of persons

A stock exchange is an association of persons or body of individuals which may be registered or unregistered.

Recognition from Central Government

A stock exchange is an organized market. It requires recognition from the Central Government.

Working as per rules

Buying and selling transactions in securities at the stock exchange are governed by the rules and regulations of stock exchange as well as SEBI Guidelines. No divergence from the rules and guidelines is allowed in any case.

Market for securities

A stock exchange is a market, where securities of corporate bodies, government and other incorporated bodies are bought and sold.

Deals in second-hand securities

It deals with shares, debentures, bonds and such securities already issued by the companies. In short it deals with existing or second-hand securities and hence it is called secondary market.

Regulates trade in securities

The stock exchange does not buy or sell any securities on its own account. It merely provides the necessary infrastructure and facilities for trade in securities to its members and brokers who trade in securities. It regulates trade activities so as to ensure free and fair trade.

Allows dealings only in listed securities

Stock exchanges maintain an official list of securities that could be purchased and sold on its floor. Securities which do not appear in the official list of stock exchange are called unlisted securities. Such unlisted securities cannot be traded in the stock exchange.

Transactions produced only through members

All the transactions in securities at the stock exchange are produced only through its authorized brokers and members. Outsiders or direct investors are not allowed to enter in the trading circles of the stock exchange. Investors have to buy or sell the securities at the stock exchange through authorized brokers only.

Specific location

Stock exchange is a particular marketplace where authorized brokers come together on working days on the floor of market called trading circles and conduct trading activities. The prices of different securities traded are shown on screens. After the working hours market is closed. All the working of stock exchanges is conducted and controlled through computers and electronic system.

Financial Barometers

Stock exchanges are the financial barometers and development indicators of economy of the country. Industrial growth and stability is reflected in the index of stock exchange.


Functions of Stock Exchange

The functions of stock exchange can be as follow:

  1. Provides Ready and Continuous Market
  2. Provides Information About Prices and Sales
  3. Provides Safety to Dealings and Investment
  4. Evaluation of Securities
  5. Mobilizes Savings
  6. Healthy Speculation
  7. Mobility of Funds
  8. Stock Exchange Helps Capital Formation
  9. Liquidity in Stock Exchange
  10. Economic Barometer
  11. Control on Companies
  12. Attracts Foreign Capital
  13. Monetary and Fiscal Policies
  14. Proper Canalization of Capital
  15. Regulation of Company Management
  16. Barometer of Business Progress

Provides Ready and Continuous Market

By providing a place where listed securities can be bought and sold regularly and conveniently, a stock exchange ensures a ready and continuous market for various shares, debentures, bonds and government securities. This lends a high degree of liquidity to holdings in these securities as the investor can en-cash their holdings as and when they want.

Provides Information About Prices and Sales

A stock exchange maintains a complete record of all transactions taking place in different securities every day and supplies regular information on their prices and sales volumes to the press and other media. This enables the investors in taking quick decisions on the purchase and sale of securities in which they are interested.

Not only that, such information helps them in ascertaining the trend in prices and the worth of their holdings. This enables them to seek bank loans if required.

Provides Safety to Dealings and Investment

Transactions on the stock exchange are conducted only amongst its members with adequate transparency and in strict conformity to its rules and regulations which include the procedure and timings of delivery and payment to be followed.

This provides a high degree of safety to dealings at the stock exchange. There is little risk of loss on account of non-payment or non-delivery. Securities and Exchange Board of India (SEBI) also regulates the business in stock exchanges in India and the working of the stockbrokers.

Evaluation of Securities

In the stock exchange, the prices of securities clearly indicate the performance of the companies. It integrates the demand and supply of securities in an effective manner. It also clearly indicates the stability of companies. Thus, investors are in a better position to take stock of the position and invest according to their requirements.

Mobilizes Savings

The savings of the public are mobilized through mutual funds, investments trusts and various other securities. Even those who cannot afford to invest in huge amounts of securities are provided opportunities by mutual funds and investment trusts.

Healthy Speculation

The stock exchange encourages healthy speculation and provides opportunities for shrewd businessmen to speculate and reap rich profits from fluctuations in security prices. The price of security is based on supply and demand position. It creates a healthy trend in the market. Any artificial scarcity is prevented due to the rules and regulations of the market.

Mobility of Funds

The stock exchange enables both the investors and the companies to sell or buy securities and thereby enable the availability of funds. By this, the money market also is strengthened as even short-term funds are available. The banks also provide funds for dealing in the stock exchanges.

Stock Exchange Helps Capital Formation

The stock exchange plays an active role in the capital formation in the country. Companies are able to raise funds either by issuing more shares through rights shares or bonus shares. But when a company wants to go in for diversification, they can issue the shares and raise more funds. Thus, they are able to generate more capital and this promotes economic growth in the country.

Liquidity in Stock Exchange

Institutions like banks can invest their idle funds in the stock exchange and earn profit even within a short period. When the necessity arises, these securities can be immediately sold for raising funds. Thus, it is the stock exchange that provides opportunities for converting securities into cash within short notice.

Economic Barometer

The most important function of a stock exchange is that it acts as an economic indicator of conditions prevailing in the country.

A politically and economically strong government will have an upward trend in the stock market, whereas an unstable government with heavy borrowings from other countries will have a downward trend in the stock market. So, every government will adopt policies in such a manner that the stock exchange remains dynamic.

Control on Companies

One of the major functions of the stock exchange is that it has control over companies. The companies listing their securities in the stock exchange have to submit their annual report and audited balance sheets to the stock exchange. Thus, only genuine companies can function and have the shares transacted. If not, such companies will be blacklisted and they will find it difficult to raise their capital.

Attracts Foreign Capital

Due to its dynamism and higher return on capital, the stock exchange is capable of attracting more foreign funds. Due to this, the exchange rate of the currency will improve when there is more trade undertaken by the government.

Monetary and Fiscal Policies

The monetary policy and the fiscal policy of the government have to be favourable to businessmen and producers. If they are not so, then through the stock exchange the government may indicate and accordingly suitable steps can be taken.

Proper Canalization of Capital

Stock exchange directs the flow of savings into the most productive and profitable channels.

Regulation of Company Management

The companies, which want to get their securities listed in the stock exchange, should have to follow certain rules and fulfil certain conditions. Thus stock exchanges safeguard the interest of the investing public and also regulate company management.

Barometer of Business Progress

Stock exchanges function as a barometer of the business conditions in the country. Booms and depressions are reflected by the index of prices of various securities maintained by the stock exchange. By analyzing the ups and downs of the market quotations, the causes for the changes in the business climate can be ascertained.


Advantages of Stock Exchanges

The existence of stock exchange is of a vital importance and it has advantages of stock exchanges:

  1. To the Companies
  2. To the Investors
  3. To the Society

To the Companies

  • The companies whose securities have been listed on a stock exchange enjoy a better goodwill and credit-standing than other companies because they are supposed to be financially sound.

  • The market for their securities is enlarged as the investors all over the world become aware of such securities and have an opportunity to invest.

  • As a result of enhanced goodwill and higher demand, the value of their securities increases and their bargaining power in collective ventures, mergers, etc. is enhanced.

  • The companies have the convenience to decide upon the size, price and timing of the issue.

To the Investors

  • The investors enjoy the ready availability of facility and convenience of buying and selling the securities at will and at an opportune time.

  • Because of the assured safety in dealings at the stock exchange the investors are free from any anxiety about the delivery and payment problems.

  • Availability of regular information on prices of securities traded at the stock exchanges helps them in deciding on the timing of their purchase and sale.

  • It becomes easier for them to raise loans from banks against their holdings in securities traded at the stock exchange because banks prefer them as collateral on account of their liquidity and convenient valuation.

To the Society

  • The availability of lucrative avenues of investment and the liquidity thereof induces people to save and invest in long-term securities. This leads to increased capital formation in the country.

  • The facility for convenient purchase and sale of securities at the stock exchange provides support to new issue market. This helps in promotion and expansion of industrial activity, which in turn contributes, to increase in the rate of industrial growth.

  • The Stock exchanges facilitate realization of financial resources to more profitable and growing industrial units where investors can easily increase their investment substantially.

  • The volume of activity at the stock exchanges and the movement of share prices reflect the changing economic health.

  • Since government securities are also traded at the stock exchanges, the government borrowing is highly facilitated. The bonds issued by governments, electricity boards; municipal corporations and public sector undertakings (PSUs) are found to be on offer quite frequently and are generally successful.

Characteristics of Stock Exchange

Following are characteristics of stock exchange:

  1. Association
  2. Mechanism
  3. Organized Market
  4. Market for Old Securities
  5. Deals With Listed Securities
  6. Only the Members Allowed Dealing
  7. Ensures Free Transferability of Securities

Association

Association: The stock market is an association of persons that may be incorporated or not.

Mechanism

Mechanism: It provides a place or mechanism through which industry and government securities may be bought and sold.

Organized Market

Organized market: It is an organized market for securities. It allows trading in securities subject to certain regulations.

Market for Old Securities

The market for old securities: It provides the ready market for old securities that have been already issued by the companies to the public. It does not deal in the fresh shares, debentures and bonds to be issued by the companies or government agencies to the public.

In the stock market transactions in old securities of companies are carried on without the involvement of companies.

Deals With Listed Securities

Deals with listed securities: It offers trading facilities only for those securities that are listed by the companies or issuing agencies with the exchange. If a company has not complied with the listing procedure of a stock market then its securities are not allowed to be traded on such a stock market.

Only the Members Allowed Dealing

Only the members allowed dealing: These stock markets allow only their members to transact the business in the market. Outsiders or nonmembers cannot purchase or sell the securities on these stock exchanges.

Membership of a 2 particular stock exchange (say Bombay Stock Exchange or National Stock Exchange or Bangalore Stock Exchange) is acquired by individuals and firms only on payment of the membership fees prescribed by that stock exchange.

Ensures Free Transferability of Securities

Ensures free transferability of securities and securities evaluation: Stock exchange provides a mechanism for the free transfer of industrial securities and also makes continuous evaluation of securities traded in the market.


Benefits of Stock Exchanges

Benefits of stock exchange are:

For Community

  • It assists the economic development by providing a body of interested investors.

  • It uploads the position of superior enterprises and assists them in raising further funds.

  • It encourages capital formation in the economy.

  • Government can undertake projects of national importance and social value raising funds through the sale of its securities on the stock exchange.

  • The stock exchanges help the central bank of the country to control credit by undertaking open market operations (purchase and sale of securities).

For Company

  • A company whose shares listed on stock exchange enjoys better reputation and credit.

  • The market for the shares of listed companies is naturally widened.

  • The market price of securities is likely to be higher in relation to its earnings, dividends and property values. This raises the bargaining power of the company in the event of a takeover, merger or amalgamation.

For Investors

  • Liquidity of the investment is increased.

  • The securities dealt on a stock exchange are good collateral security for loans.

  • The stock exchange safeguards interests of investors through strict enforcement of rules and regulations.

  • The present net worth of investments can be easily known by the daily quotations.

Stock Exchanges of India

Bombay Stock Exchange (BSE)

Established in 1875, BSE Ltd. (formerly known as Bombay Stock Exchange Ltd.), is Asia’s first Stock Exchange and one of India’s leading exchange groups. Over the past 137 years, BSE has facilitated the growth of the Indian corporate sector by providing it an efficient capital-raising platform.

Popularly known as BSE, the bourse was established as “The Native Share & Stock Brokers’ Association” in 1875. BSE is a corporatized and demutualised entity, with a broad shareholder-base which includes two leading global exchanges, Deutsche Bourse and Singapore Exchange as strategic partners. BSE provides an efficient and transparent market for trading in equity, debt instruments, derivatives, mutual funds. It also has a platform for trading in equities of small-and-medium enterprises (SME).

In 2005, BSE was given the status of a full- fledged public limited company along with a new name as “Bombay Stock Exchange Limited”. The BSE has computerized its trading system by introducing BOLT (Bombay on Line Trading) since March 1995.

More than 5000 companies are listed on BSE making it world’s No. 1 exchange in terms of listed members. The companies listed on BSE Ltd command a total market capitalization of USD 1.32 Trillion as of January 2013. It is also one of the world’s leading exchanges (3rd largest in December 2012) for Index options trading (Source: World Federation of Exchanges).

BSE also provides a host of other services to capital market participants including risk management, clearing, settlement, market data services and education. It has a global reach with customers around the world and a nation-wide presence. BSE systems and processes are designed to safeguard market integrity, drive the growth of the Indian capital market and stimulate innovation and competition across all market segments.

BSE is the first exchange in India and second in the world to obtain an ISO 9001:2000 certification. It is also the first Exchange in the country and second in the world to receive Information Security Management System Standard BS 7799-2-2002 certification for its On-Line trading System (BOLT). It operates one of the most respected capital market educational institutes in the country (the BSE Institute Ltd.). BSE also provides depository services through its Central Depository Services Ltd. (CDSL) arm.

BSE’s popular equity index – the S&P BSE SENSEX – is India’s most widely tracked stock market benchmark index. It is traded internationally on the EUREX as well as leading exchanges of the BRCS nations (Brazil, Russia, China and South Africa).

BSE has won several awards and recognitions that acknowledge the work done and progress made like The Golden Peacock Global CSR Award for its initiatives in Corporate Social Responsibility, NASSCOM – CNBC-TV18’s IT User Awards, 2010 in Financial Services category, Skoch Virtual Corporation 2010 Award in the BSE STAR MF category and Responsibility Award (CSR) by the World Council of Corporate Governance. Its recent milestones include the launching of BRICSMART indices derivatives, BSE-SME Exchange platform, S&P BSE GREENEX to promote investments in Green India.

National Stock Exchange (NSE)

National Stock Exchange of India Limited (NSE) formed in 1992 is one important development in the Indian capital market. The need was felt by the industry and investing community since 1991. The NSE is slowly becoming the leading stock exchange in terms of technology, systems and practices in due course of time. NSE is the largest and most modern stock exchange in India.

In addition, it is the third largest exchange in the world next to two exchanges operating in the USA The NSE boasts of screen based trading system. In the NSE, the available system provides complete market transparency of trading operations to both trading members and the participants and finds a suitable match.

The NSE does not have trading floors as in conventional stock exchanges. The trading is entirely screen based with automated order machine. The screen provides entire market information at the press of a button. At the same time, the system provides for concealment of the identity of market operations. The screen gives all information which is dynamically updated. As the market participants sit in their own offices, they have all the advantages of back office support, and facility to get in touch with their constituents.

  • Wholesale debt market segment;
  • Capital market segment; and
  • Futures & options trading

Over the Counter Exchange of India (OTCEI)

The OTCEI was incorporated in October, 1990 as a Company under the Companies Act 1956. It became fully operational in 1992 with opening of a counter at Mumbai. It is recognized by the Government of India as a recognized stock exchange under the Securities Control and Regulation Act 1956. It was promoted jointly by the financial institutions like UTI, ICICI, IDBI, LIC, GIC, SBI, IFCI, etc. It is the first exchange for small companies. It is the first screen based nationwide stock exchange in India. It assists in efficient capital formation, market making and helps start-ups and young entrepreneurs in getting the required capital.

The Exchange was set up to aid enterprising promoters in raising finance for new projects in a cost effective manner and to provide investors with a transparent and efficient mode of trading. Modelled along the lines of the NASDAQ market of USA, OTCEI introduced many novel concepts to the Indian capital markets such as screen-based nationwide trading, sponsorship of companies, market making and scripless trading. As a measure of success of these efforts, the Exchange today has 115 listings and has assisted in providing capital for enterprises that have gone on to build successful brands for themselves like VIP Advanta, Sonora Tiles & Brilliant mineral water, etc.

Securities are traded on OTCEI through the ‘OTCEI Automated Securities Integrated System’ (OASIS); a state-of-art screen based trading system. OASIS combines the principles of order driven and quotes driven markets and enables trading members to access a transparent and efficient market directly through a nationwide telecommunication network.

Inter-connected Stock Exchange of India Limited (ISE)

It is a national-level stock exchange, providing trading, clearing, settlement, risk management and surveillance support to its Trading Members. ISE incorporated as a company limited by guarantee in January, 1998. It has 791 Trading Members, who are located in 84 cities spread across 18 states. These intermediaries are administratively supported through the regional offices at Delhi, Kolkata, Patna, Ahmedabad, Coimbatore and Nagpur, besides Mumbai.

ISE aims to address the needs of small companies and retail investors by harnessing the potential of regional markets, so as to transform them into a liquid and vibrant market using state-of-the art technology and networking. ISE has floated ISE Securities & Services Limited (ISS) as a wholly-owned subsidiary under the policy formulated by the Securities and Exchange Board of India (SEBI) for “Revival of Small Stock Exchanges”.

The policy enunciated by SEBI permits a stock exchange to float a subsidiary, which can take up membership of larger stock exchanges, such as the National Stock Exchange of India Limited (NSE), and Bombay Stock Exchange Limited (BSE). ISS has been registered by SEBI as a Trading-cum-Clearing Member in the Capital Market segment and Futures & Options segment of NSE and Capital Market segment of BSE. Trading Members of ISE can access NSE and BSE by registering themselves as Sub-brokers of ISS.

Thus, the trading intermediaries of ISS can access other markets in addition to the ISE market. ISS thus provides the investors in smaller cities, a one-stop solution for cost-effective and efficient trading and settlement services in securities.

Complementing the stock trading function, ISE’s depository participant (DP) services reach out to intermediaries and investors at industry-leading prices. The Research Cell has been established with the objective of carrying out quality research on various facets of the Indian financial system in general and the capital market in particular.

Objectives

  • Create a single integrated national-level solution with access to multiple markets by providing high cost-effective service to investors across the country.

  • Create a liquid and vibrant national-level market for all listed companies in general and small capital companies in particular.

  • Optimally utilizing the existing infrastructure and other resources of Participating Stock Exchanges, which are under-utilized now.

  • Provide a level playing field to small Trading Members by offering opportunity to participate in a national market for investment-oriented business.

  • Provide clearing and settlement facilities to the Trading Members across the country at their doorstep in a decentralized mode.

  • Spread demat trading across the country.

Role of Stock Exchanges in Securities Market of India

Following are the role of stock exchanges in securities market:


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