Stock Exchange: Definition, Types and Benefits

A stock exchange, like a conventional marketplace, is about buying and selling. However, instead of physical products, financial instruments like bonds, stocks, and commodities are traded in a stock exchange. In India, though such exchanges have a physical presence, they can be accessed digitally by both buyers (those interested in investing and building wealth) and sellers (companies looking to raise capital for expansion, acquisition and more). 

Stock exchanges are integral to the Indian finance system as they help listed businesses raise the necessary funds for growth and employment generation, which contributes to overall economic development. Hence, stock exchanges are regulated closely by the Securities and Exchange Board of India (SEBI), which ensures smooth trading, prevents illegal or unfair activities, and protects investor interests.  

Now, let’s understand stock exchanges a little better, how they work, what advantages they offer companies and investors, and the types of exchanges in India. 

Are the Stock Market and the Stock Exchange the Same? 

Though the terms stock market and stock exchange are often used interchangeably, there is a subtle difference between the two. A stock market is composed of a primary market and a secondary market, and the latter is the stock exchange. Confused? This example will throw more light on the subject: 

Say a company called ABC needs to raise a large amount of capital for expansion. It can be a tough task to depend only on angel investors or venture capitalists to do so. Availing a loan from a financial institution can turn out to be a significant obligation down the road as well. So, the company decides to offer its shares via an Initial Public Offering (IPO) to the general public. 

In other words, buyers or investors can purchase shares (parts of the company) and claim ownership of a percentage of the company, depending on the volume and value of shares. The primary market is where all of this takes place.    

Once the shares are floated for the first time in the primary market, those who bought directly from the company ABC can now trade the shares in the secondary market or stock exchange. Here are a few things to know about such trades: 

• As a trader on the stock exchange, you can buy or sell shares strategically to make money.  
• The share price constantly fluctuates based on the company’s performance, profit, and market sentiment surrounding the company. 
• Your decision to sell or purchase shares depends on their expected profitability. 
• A trade occurs when the buying price quoted by buyers matches the selling price quoted by sellers. An order-matching algorithm ensures that the best-sell order aligns with the best-buy order.  

• All transactions take place electronically on a broker’s portal these days. Brokers act like a bridge between buyers and sellers and earn a fee from every trade they settle. 

Since a stock exchange is an order-driven market, data related to shares and transactions are displayed publicly, which ensures transparency and stability in the Indian financial system. 

Why Companies List on Stock Exchanges?

As per a recent Ernst & Young report, India’s IPO market witnessed 80 listings in 2023, a 33% spike from 2022. Moreover, as far as global IPO numbers go, our country’s share went from 6% in 2021 to 11% in 2022 to 13% in 2023. This increase in IPO activity can be mostly attributed to the rise in entrepreneurial activities. So, why are more and more companies eager to list themselves on the stock exchange? 

There are multiple reasons, but before we delve into them, let’s understand how the listing commences in the primary market:

• Issuing an IPO is the first step when a company wants to list on the stock exchange. 
• Before submitting their IPO application, a company must comply with SEBI’s regulations. 
• Once the IPO application is accepted or approved, interested retail and institutional investors subscribe to the IPO and buy the shares. 
• Since a limited number of shares are available, not every investor who subscribes to the IPO receives a share. 
• To eliminate bias while selecting beneficiaries, share allotment happens randomly.    
• Shares are listed on the stock exchange after being allotted to investors. 

Benefits of Listing for Companies 

• Easy fundraising:

Any company’s chief reason behind listing on the stock exchange is raising capital from the common man. The funds collected can be used to repay debts, establish new plants or offices, acquire smaller companies, boost operations, hire more manpower, and so on. Since the pool of investors is extremely large, a company can spread out any associated risk thinly. 

• Better brand awareness:

By listing on stock exchanges, companies, especially start-ups or those new in the industry, can improve brand awareness among the general public. This way, they don’t need to invest in promotional or marketing activities.  

• Improved shareholder trust:

Since a company must comply with the stringent regulations set by SEBI, shareholders like you know that there is minimal chance of fraud or malpractice. Hence, through listing, a company gains and improves investor confidence and trust. 

• Exit option for existing investors:

Before a company goes public, angel investors and venture capitalists usually meet their capital needs. However, once the company is listed on a stock exchange, such investors can choose to sell their shares to the general public through an Offer for Sale and liquidate their stake completely or partly. Put simply, the public listing of the company gives them an exit route. 

• Easy share marketability:

Stock exchange listing makes it easy to trade or market a company’s shares. Essentially, they become liquid, which encourages investors like you to buy and sell these shares frequently or repeatedly.  

• Enhanced employee motivation:

By listing on stock exchanges, a company can attract potential employees or retain current ones by offering shares or stock ownership. This can help them lower the monetary compensation as well.  

• Greater creditworthiness:
  

  Listed securities are deemed as suitable collateral by most lending institutions. This means that if a company is listed on the stock exchange, it becomes easier for them to get a loan.  

Pros of Investing Through Stock Exchanges 

Investing in shares through the stock exchange often requires you to gather some essential financial and analytical knowledge and skills as well as develop a knack for spotting trends and patterns through data. However, there are multiple benefits involved, as outlined below:  

• Diversification:

You can build a diversified investment portfolio that features a wide variety of stocks, ranging from low-risk to high-risk or based on your financial goals. These can be from different industries or sectors, too. This means, you won’t have to put all your eggs in one basket and can improve your chances of decent returns too.  

• Safety:

Since SEBI closely oversees and regulates stock exchange activities, the trading infrastructure is transparent, secure, and yet affordable. You don’t have to worry about your funds getting stolen or some big player manipulating the market and compromising your interests.  

• Liquidity:

Since stocks are highly liquid in nature, you can sell them anytime you want to meet other needs. 

• Fair pricing:

When you buy or sell stocks on the stock exchange, the prices are determined by the forces of supply and demand, and this information is publicly available. This means that you can be reasonably confident that you're trading at a price that reflects the market's assessment of the stock's value at that moment. However, it's important to note that stock prices can be highly volatile and may not always perfectly reflect a stock's true intrinsic value due to market emotions and perceptions. So, while it's generally a fair pricing mechanism, it's not always precise. 

• Profit potential:

Since share prices are highly volatile and constantly changing, even the slightest movement can help investors like you to make a profit. This is especially true if you can read data effectively, consider historical trends, and learn from your mistakes. 

Though stockbrokers charge a certain fee for offering guidance and easing trades, the cost is far outweighed by the profit you are likely to make over time. 

Types of Stock Exchanges in India 

The two main stock exchanges that influence the Indian financial ecosystem are – the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). 

• Bombay Stock Exchange:

Founded in 1875, BSE and Mumbai’s Dalal Street are practically synonymous. It is Asia’s oldest stock exchange and has more than 5,000 listings. BSE is also among the fastest stock exchanges in the world. The S&P BSE Sensex Index was developed in 1986 to assess the overall performance of the stock market. Other popular indices include S&P BSE 100, S&P BSE MidCap, S&P BSE 50, etc. In 1995, BSE transitioned from an open outcry to an electronic trading system. As of January 2024, its market capitalisation is pegged at over ₹373 lakh crore. 

• National Stock Exchange:

Established in 1992 and recognised by SEBI in 1993, NSE is also located in Mumbai and boasts over 2,000 listings. It was our country’s first dematerialised stock exchange. The chief aim behind setting up NSE was to end BSE’s monopolisation in India’s stock market. As of January 2024, its market capitalisation is estimated to be over ₹370 lakh crore. During 2021 to 2022, over 5 crore (Soruce: https://www.nseindia.com/national-stock-exchange/history-milestones) unique investors were found to constitute NSE’s registered investor base. Its indices include NIFTY 50, NIFTY 500, NIFTY Next 50, NIFTY Midcap 100, etc. 

The following are some other stock exchanges in the country:

• India International Exchange:

As the name suggests, this was the first international exchange in the country and was inaugurated in 2017. Situated in GIFT City, Gujarat, it acts as a subsidiary of BSE. India International Exchange operates 6 days a week and for 22 hours every day. It enables international investors and NRIs to trade from any location and across different time zones. In March 2021, the exchange recorded an all-time high turnover of US$ 30.30 billion (Source: https://www.indiainx.com/)

• National Commodities and Derivatives Exchange (NCDEX):

India’s top agricultural commodity exchange, NCDEX, is owned by the Ministry of Finance. Founded in 2003, it is headquartered in Mumbai and regulated by SEBI. 

• Multi Commodity Exchange of India (MCX):

The first listed exchange in the country, MCX was established by the Indian Government in 2003. Like other key stock exchanges, it is also located in Mumbai. It offers the largest platform in India for commodity derivatives trade. 

• Indian Commodity Exchange Limited (ICEX):

Registered with SEBI in 2017, ICEX offers a platform for trading in derivatives of industrial and precious metals, oil complexes, agricultural products, spices, energy products, and fibres. It has its headquarters in Mumbai and launched the first diamond derivatives contract in the world in 2017. 

• Calcutta Stock Exchange Limited (CSE):

The oldest government-owned exchange in Asia, CSE was granted permanent recognition in 1980 as per the Securities Contracts Regulation Act 1956. Until 1997, it followed an open outcry system, which was later replaced by an electronic trading platform. However, in 2013, SEBI barred any trading on CSE’s platform owing to compliance and regulatory problems. Since then, this exchange has only been offering members a platform for trading on NSE. 

Key Takeaways 

• Stock exchanges facilitate trading in stocks, bonds, and commodities and are regulated by SEBI for smooth and safe functioning. 
• A stock market comprises a primary market and a secondary market, and the latter is also known as a stock exchange. 
• Stock exchange transactions occur electronically and in microseconds, backed by an order-matching algorithm. 
• Companies list on stock exchanges to raise capital easily, generate brand awareness, and increase shareholder trust, among other things. 
• Investing through the stock exchange helps you diversify your portfolio, trade safely, enjoy liquidity, capitalise on fair prices, and earn unlimited profit. 
• There are different types of stock exchanges in India, with BSE and NSE being the major ones. 
• Stock exchanges mobilise savings from the general public, drive capital growth and employment generation, and contribute to overall economic development.