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Stock exchanges are the infrastructures or buildings where the buyers and sellers meet physically or virtually to trade securities.
Well, the name is stock exchange but all types of securities like stocks, bonds, and derivatives are traded here and this is the reason why stock exchange is also known as ‘Securities Exchange’.
Many people think that the stock market and stock exchange are the same terms. But it is not true. The stock market of any country is the network of stock exchanges in that country i.e. the stock market is the network of stock exchanges. For instance, BSE and NSE form the stock market of India.
That’s why we say that the stock exchanges are part of the broader stock market ecosystem.
Examples of Stock exchanges
Based on the region/area, stock exchanges in India can be categorized into two categories:
1. Nationwide Stock Exchange
These are the main exchanges on which most of the trading is done by investors and traders across India. We have 2 nationwide stock exchanges which are…
1.1 BSE
- Bombay Stock Exchange is the oldest stock exchange in India as well as in Asia.
- More than 5400 companies are listed on it.
- SENSEX is the stock index of BSE.
- BSE is in Mumbai.
1.2 NSE
- NSE stands for National Stock Exchange.
- Around 2000 companies are listed on NSE.
- NSE’s stock index is Nifty
- It is also in Mumbai. (But many consider its location to be Delhi because of the word “national” in its name).
2. Regional Stock Exchange
Exchanges that serve the regional areas, i.e. mainly a particular state, are known as regional stock exchanges.
There used to be 21 regional stock exchanges in India but after SEBI tightened its rules and regulations only 1 regional stock exchange is left which is active and it is…
CSE
- Calcutta Stock Exchange is the second oldest stock exchange in India and Asia.
- Approximately 2700 companies are listed on CSE.
- The stock index of the Calcutta stock exchange is CSE 40
- CSE is located in Kolkata.
Another 20 non-active regional stock exchanges that have closed down are:
- Ahmadabad Stock Exchange
- Delhi Stock Exchange
- Guwahati Stock Exchange
- Jaipur Stock Exchange
- Madhya Pradesh Stock Exchange
- Madras Stock Exchange
- Pune Stock Exchange
- Vadodara Stock Exchange
- Bangalore Stock Exchange
- OTC Exchange of India
- Inter-connected Stock Exchange of India
- Cochin Stock Exchange
- Ludhiana Stock Exchange
- Bhubaneshwar Stock Exchange
- Coimbatore Stock Exchange
- Magadh Stock Exchange
- Trivandrum Stock Exchange
- Mangalore Stock Exchange
- Hyderabad Stock Exchange
- UP Stock Exchange
How a Stock exchange works
To understand the work functioning of a stock exchange, we need to know the concept of the primary and secondary markets.
- Primary Market: When a company wants to raise share capital from the general public, through IPO or FPO, then it issues its shares in the primary market and raises the funds. In the primary market, transactions of shares and money occur between the company and the investors, where the issuing company is generally called the ‘issuer’. As the company issues the new securities, the primary market is also known as the ‘new issue market’.
- Secondary Market: The issued shares are traded here between the investors which means that the transaction occurs between an investor and the other investor. The other name for the secondary market is ‘aftermarket’.
Although the physical and secondary market does not have any physical infrastructure like stock exchanges and the market regulator SEBI, still a stock exchange is understood as the secondary market. The reason behind this understanding is that people buy and sell securities through the stock exchange and at the same time they are trading in the secondary market.
So, our question that ‘how does a stock exchange work?’ has the answer that a stock exchange works as the intermediary between the investors (and also between the investor and the company; in case of public issue or any other corporate action).
Importance of Stock exchange
- Securities’ transparent pricing
Stock exchanges ensure that traders and investors have access to accurate, up-to-date pricing and order information to make investment decisions. Exchanges play a major role in providing fair securities pricing, while efficiently matching buyers and sellers.
- Secure transactions
Exchanges ensure that the buyers and sellers meet the required requirements and follow the rules and regulations directed to minimize the risk of default.
- Liquidity
Stock exchanges help companies raise capital while providing buyers and sellers with instant access to orders. Exchanges promote liquidity in the market, allowing the rapid exchange of securities without significantly affecting their price.
- Investor protection
From an institutional investor to a newbie with limited financial knowledge, everyone is investing in the stock market. So, it becomes important for a stock exchange to offer protection to all kinds of investors. This boosts consumer confidence and protects less experienced investors from serious financial losses.
Pros & Cons of Stock exchange
There is a range of pros and cons for both companies listed on stock exchanges and those wishing to trade on them.
Pros of Stock exchange
- If a company is listed then it becomes easier for it to attract new investors.
- As an investor, investing in securities of companies listed on stock exchanges is far safer than investing in companies that are not listed.
- Trading through a stock exchange is more reliable than OTC trading because exchange trading has transactional safety while the OTC market is less regulated and contains smaller, riskier companies such as penny stocks that meet the listing requirements for established stock exchanges. does not fulfill.
Cons of Stock exchange
- For a company, getting listed on the stock exchange is a very expensive and time-consuming process.
- A lot of rules and regulations have to be followed to trade through a stock exchange, whereas OTC trading takes place only between two parties i.e. no intermediary like a stock exchange.
- Although there is transactional security in exchange trading; you cannot predict the intensity of market volatility (if it occurs).
Purpose of Stock exchange
- To connect buyers and sellers.
- To bring transparency, stability, and efficiency to the trading process.
Conclusion
Stock exchanges are the most important financial intermediaries of the stock market. But a stock exchange is not everything in itself. Depositories and clearing houses form the entire ecosystem of trading and investment along with the stock exchanges.
As long as we are talking about stock exchanges, they are the ones where shares, after a public issue of any company, get listed and are traded on the exchange after being listed.
The shares listed on the exchange make up the index and this stock index, in turn, represents the economic health of the country.
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