Stock Exchange

A Stock Exchange (also known as Share Market or Stock Market) is an institution that provides a platform for buying and selling existing securities (shares, debentures, bonds, etc.). It is a vital part of the capital market, specifically the secondary market.

A stock exchange is a recognised market where members of the exchange trade in securities on behalf of themselves and their clients.

In India, stock exchanges are regulated by the Securities and Exchange Board of India (SEBI).

Example: Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) are the major stock exchanges in India.

Key function: Facilitating the trading of previously issued securities.

Functions Of A Stock Exchange

Stock exchanges perform several crucial functions for investors, companies, and the economy as a whole:

1. Providing Liquidity and Marketability to Existing Securities: This is the primary function. Investors can easily buy or sell their holdings of shares and debentures through the stock exchange, converting them into cash whenever needed. This marketability encourages people to invest in securities.

2. Pricing of Securities: Share prices on a stock exchange are determined by the forces of demand and supply. This pricing reflects the market's perception of the company's performance and future prospects, providing a continuous valuation of securities. The stock market serves as a barometer of the economy.

3. Safety of Transaction: Trading on a recognised stock exchange is regulated by legal framework and rules. SEBI's regulations ensure that trading is done in a fair, transparent, and orderly manner, protecting the interests of investors.

4. Contribution to Economic Growth: By providing a platform for trading existing shares and providing liquidity, the stock exchange encourages investment in the primary market. This facilitates capital formation, which is essential for economic growth.

5. Spreading of Equity Cult: Stock exchanges play a role in educating the public about the benefits of investing in shares and other securities, encouraging wider participation in the capital market.

6. Providing Scope for Speculation (within a regulatory framework): Speculative activities by buyers and sellers (expecting future price changes) help in maintaining liquidity in the market. However, excessive speculation can be detrimental and is regulated by SEBI.

7. Providing Liquidity to Financial Assets: Similar to providing liquidity to securities, the market ensures that various financial instruments listed on the exchange can be easily bought and sold.

8. Better Allocation of Capital: Stock prices reflect the performance of companies. Companies with good performance have higher share prices, making it easier for them to raise further funds. This directs savings towards more productive uses in the economy.

Trading And Settlement Procedure

Trading in stock exchanges in India is now done electronically through trading terminals. The entire process involves several steps:

1. Selection of a Broker: An investor needs to open a trading account and Demat account with a registered broker who is a member of the stock exchange (or trades through a member).

2. Opening a Demat Account: Dematerialisation is mandatory for trading in listed securities. A Demat account holds securities in electronic form.

3. Placing the Order: The investor places an order (buy or sell) with the broker, specifying the name of the company, quantity of shares, and the price (market order or limit order).

4. Executing the Order: The broker executes the order through the stock exchange's electronic trading system.

5. Issuing a Contract Note: Once the order is executed, the broker issues a contract note to the investor, confirming the trade details.

6. Settlement: The settlement process involves the exchange of securities for cash. In India, T+1 settlement is followed for most equity trades, meaning settlement is completed within one working day from the trading day. The buyer's Demat account is credited with shares, and the seller's Demat account is debited. Cash is transferred between the broker and the exchange/clearing corporation, and subsequently between the broker and the investor.

This entire process is facilitated by intermediaries like brokers, clearing corporations, and depositories.

Stock Trading and Settlement Process Flow

Dematerialisation And Depositories

Earlier, share certificates were held in physical form, which involved risks like theft, forgery, and delays in transfer. To overcome these issues, the system of Dematerialisation and Depositories was introduced in India.

Dematerialisation (Demat) is the process by which physical share certificates are converted into electronic form and held in a Demat account with a Depository Participant (DP).

Benefits of Demat: Eliminates risks associated with physical certificates, ensures instant transfer of securities, facilitates easy and faster trading, reduces transaction costs (compared to physical shares).

Depository

A Depository is an institution that holds securities (like shares, debentures, bonds, government securities, mutual fund units) in electronic form. It functions like a bank for securities. Just as a bank holds funds in accounts, a depository holds securities in electronic accounts.

In India, there are two main depositories:

1. National Securities Depository Ltd (NSDL): Promoted by National Stock Exchange (NSE), IDBI Bank, and Unit Trust of India (UTI).

2. Central Depository Services (India) Ltd (CDSL): Promoted by Bombay Stock Exchange (BSE) and Bank of India.

These depositories provide their services through intermediaries called Depository Participants (DPs). DPs are agents of the depository and act as the link between the investor and the depository. Banks, financial institutions, and brokers can act as DPs.

An investor who wants to hold securities in electronic form or trade on a stock exchange must open a Demat account with a DP.

National Stock Exchange Of India (Nse)

The National Stock Exchange of India Ltd (NSE) is one of the premier stock exchanges in India, located in Mumbai. It was established in 1992 as a demutualised electronic exchange. It played a significant role in transforming the Indian stock market by introducing screen-based electronic trading, which brought transparency and efficiency.

NSE introduced indices like Nifty 50, which is a benchmark index representing the weighted average of 50 of the largest Indian companies listed on NSE.

Bse (Bombay Stock Exchange Ltd.)

The BSE (formerly Bombay Stock Exchange Ltd.) is the oldest stock exchange in Asia, established in 1875, located in Mumbai. It was the first stock exchange in India to be granted permanent recognition under the Securities Contracts (Regulation) Act, 1956.

BSE also operates an electronic trading system. Its benchmark index is Sensex (Sensitive Index), which represents 30 large and actively traded stocks listed on BSE.

Both NSE and BSE are major players in the Indian capital market, providing platforms for trading a wide range of securities.

Example 4. An investor buys 50 shares of Reliance Industries Limited on the National Stock Exchange. Explain how the investor receives these shares in his account.

Answer:

Since trading in listed securities is in dematerialised form, the investor needs to have a Demat Account linked to his trading account. After the trade is executed on the NSE and the settlement process is completed (typically T+1 day), the shares are transferred electronically from the Demat account of the seller to the investor's Demat account, which is maintained with a Depository Participant (DP) affiliated with either NSDL or CDSL.