What is the Stock Exchange? How They Work and Why They Matter?

A stock exchange is a crucial part of the stock market, serving as a platform where traders and investors buy and sell financial instruments like stocks, bonds, and commodities. In India, stock exchanges operate under strict regulations set by the Securities and Exchange Board of India (SEBI), ensuring transparency and protecting investor interests.

What is a Stock Exchange?

A stock exchange in India functions as a marketplace for buying and selling financial assets, including shares and bonds. Transactions happen during specified business hours, and only companies listed on the exchange can trade. While unlisted companies can trade in the Over-The-Counter (OTC) Market, their stocks lack the credibility of those listed on major exchanges.

How Does a Stock Exchange Work?

Unlike some international markets, stock exchanges in India are order-driven and rely on electronic platforms to execute trades. Here’s how it works:

• Orders from investors are matched through a computer-based system without the need for market makers or specialists.
• The system ensures transparency by publicly displaying all orders.
• Brokers play a key role by facilitating transactions between investors and the exchange.
• Both institutional investors and retail customers can use Direct Market Access (DMA), placing orders directly through broker-provided trading terminals.

Benefits of Listing with a Stock Exchange

Being listed on a reputable stock exchange offers several advantages for companies and investors:

1. Increased Value

Only stocks listed with a reputable stock exchange are considered to be higher in value. Companies can cash in on their market reputation in the stock exchange market by increasing their number of shareholders. Issuing shares in the market for shareholders to acquire is a potent way of increasing shareholder base and base, which in turn increases their credibility.

2. Access to Capital

One of the most effective ways of availing cheap capital for a company is by issuing company shares in the stock exchange market for shareholders to acquire. Listed companies can generate comparatively more capital through share issuance owing to their repute in a stock exchange market and use it to keep their company afloat and its operations running.

3. Collateral Value

Almost all lenders accept listed securities as collateral and extend credit facilities against them. A listed company is more likely to avail a faster approval for their credit request; as they are deemed more credible in the stock exchange market.

4. Liquidity

Shareholders benefit from the liquidity that stock exchanges provide. Listed stocks can be easily bought and sold, allowing investors to estimate the value of their investments and exit positions when needed.

Additionally, it permits share transactions with a company and helps them to even out the associated risks. It also helps shareholders to improve their earnings from even the slightest increase in overall organisational value.

5. Fair Pricing

Since stock prices on exchanges are driven by supply and demand, and pricing information is publicly available, investors can trust that they are paying a fair price for securities.

Investment Methods in Indian Stock Exchanges

Investors can access stock exchanges in India through two primary methods:

1. Primary Market

This is where companies first issue new shares to the public, typically through an Initial Public Offering (IPO). Investors buy shares directly from the company in the primary market.

2. Secondary Market

The secondary market is also known as the stock market; it acts as a trading platform for investors. Here, investors trade in securities without involving the companies who issued them in the first place with the help of brokers. This market is further broken down into- auction market and dealer market.

Major Stock Exchanges in India

India is home to several prominent stock exchanges. The two largest are:

1. Bombay Stock Exchange (BSE)

• Established in 1875, BSE is Asia’s oldest stock exchange.
• Its market capitalization stands at approximately $4.9 trillion, with around 6,000 companies listed.
• The performance of BSE is tracked by its index, Sensex.

2. National Stock Exchange (NSE)

• Founded in 1992, NSE is the pioneer of electronic trading in India.
• It has a market capitalization of around $4.1 trillion and is globally known for its index, Nifty 50.

List of Stock Exchanges in India

Apart from BSE and NSE, other key stock exchanges in India include:

• Multi-Commodity Exchange (MCX)
• National Commodity and Derivatives Exchange (NCDEX)
• India International Exchange (India INX)
• NSE IFSC
• Indian Commodity Exchange (ICEX)
• Calcutta Stock Exchange (CSE)
• Metropolitan Stock Exchange (MSE)

Stock Exchanges and Economic Growth

Stock exchanges play a pivotal role in shaping a country’s financial landscape. Their collective performance is a key indicator of economic health. Moreover, global stock exchanges are interconnected—if a major exchange like BSE experiences a significant drop, it can impact international markets such as the New York Stock Exchange or Tokyo Stock Exchange.