There are two types of securities market – primary market and secondary market. Securities come first in the primary market and then are always available for purchase and sale in the secondary market. This secondary market is called stock market and it is also called stock exchange .
In this article, we will discuss the stock exchange in a simple and easy way and understand its various important aspects, so read the article till the end.
Note – If you want to understand the basics of share market from zero level then you should start with Part 1. – Share Market and Related
| What is stock exchange?
If a company has to sell its shares, then they will not sell from door to door, so there must be a place from where the company can sell its shares and investors can buy it from there. That’s where the place is, the stock exchange .
In other words, stock exchange is a financial organization where securities market components such as shares, bonds, debentures, etc., are bought and sold.
The stock exchange i.e. the stock market works to provide money and liquidity to the companies and provides an accessible and transparent platform to the investors, traders and the company for all.
According to the Securities Markets (Regulatory) Act 1956 , stock market means a market established for the purpose of assisting, regulating and controlling the trading, settlement of securities.
| Major Functions of Stock Exchange
1. Stock exchange provides liquidity in the securities market through buying and selling of securities. That is, people bring their money out of their homes and bring it to the market, which is also its right place.
2. The stock exchange is the single most important institution in the secondary securities market, which provides valuable information to investors by determining the value of shares. The pricing of shares is determined by the principle of demand and supply.
3. It provides information about the current status, trends, etc. of the securities market through its Indices. So that investors get to know about the mood of the market.
4. It provides listed companies the information of their current stockholders, so that companies get many facilities. Such as the distribution of dividends.
5. The stock market provides a legal place for speculators where they can participate in speculative activities and try their luck within the legal provisions.
| History of Stock Exchange in India
The first stock exchange in the world was established in 1631 in Antwerp, Belgium. According to this, it came quite late in India because the history of its debut is visible in the late 18th century.
Although formally the first stock exchange in India was established in 1875 in Bombay.
Its name was ‘Bombay Native Shares and Stock Brokers Association ‘. Today it is known as Bombay Stock Exchange (BSE) .
Later on, stock exchanges developed in Ahmedabad (1894), Calcutta (1908) and Madras (1937) as well. It may be noted here that till the early 1990s the Indian secondary market was confined to the regional local stock exchange .
After the reforms of 1991, the Indian secondary market acquired a three-tier character. These included – regional stock exchange, national stock exchange , over the counter exchange of India (OTCEI) .
| Bombay Stock Exchange (BSE)
Earlier it was a regional stock exchange (regional stock exchange) which was converted into national stock exchange in 2002. 75 percent of the total stock of India is traded through this.
At present there are four stock indices affiliated to BSE. 1. Sensex 2. BSE 200 3. BSE 500 4. National Index. Out of this, the most famous index is the Sensex. We will understand about the Sensex, but before that let us know what is an index.
| What is an index?
An index is a way to track the performance of something in a standardized way. In other words, the sequential arrangement of a material (especially in alphabetical or numerical order) is called an index. For example, a standardized way to track the stock market is called a stock index.
What is sensex? The index which is for BSE is called Sensex. SENSEX means – Sensitive Index
Sensex is actually an index of 30 largest companies. It is used to tell the current status of the stock market. It shows whether the stock market is performing well or badly.
If 30 largest companies of the country are performing well, then it is assumed that the stock market is doing well and if those 30 companies are going into losses then it means the stock market is falling.
Now the question may come in your mind that why only 30 companies while there are millions of companies here.
The fact is that this is the largest 30 companies, their market value is so high that this gives a rough idea of the entire market, in which direction the market will go.
You can understand this in this way – suppose there are 3-4 good batsmen in a team, then by just looking at his game, it can be guessed in which direction the whole game will go.
The same thing happens here also, seeing the performance of the biggest 30 companies, it is estimated that in which direction the market is going or going to go.
When the Sensex was launched in 1979, the value of 30 companies was kept at 100. That is, the Sensex at that time was 100. Whereas if we talk about today’s Sensex, today it is 60,000.
This means that if someone had bought a stock worth Rs 100 on that day, then according to today its value would have become Rs 60,000. Now you must be understanding that why the rise of the Sensex is good for the investors.
Similarly , Bombay Stock Exchange issues 3 more types of indices, such as BSE 200 – Just as Sensex shows the performance of 30 companies, similarly BSE 200 is an index of 200 companies, which includes 30 companies of Sensex.
Its dollar version has also been made for foreign investors, which is called Dollex. Similarly , BSE 500 is the index of the largest 500 companies and the national index is an index of a total of 100 companies, which includes the companies of the Sensex.
Overall , this is the basics of the Sensex and the Index. Similarly, each stock exchange has its own index. For example, if we talk about National Stock Exchange (NSE), they issue index in the name of Nifty.
Which is an index of the largest 50 companies of the country. It is different from the Sensex in the sense that while the base value of the Sensex is 100, the base value of the Nifty is 1000.
| Over the Counter Exchange of India (OTCEI)
OTCEI started operations in 1992 and is based in Mumbai. It works under the Ministry of Finance, Government of India. It was India’s first exchange for small companies as well as the first computerized stock exchange in India.
OTCEI was established with the objective of preventing settlement delays, preventing frauds and connecting small companies to the stock market.
However, OTCEI is no longer a functional exchange as it has been derecognised by SEBI vide its order dated 31 March 2015.
Now we will talk about the components of the stock exchange, which is a part of the stock exchange itself and they help to keep it running well.
| components of stock exchange
Broker or Dalal – It acts as a middleman who is a registered member of the stock exchange. It buys or sells securities on behalf of its client and charges its commission on the total transaction. That is why it is also called commission broker. For example, Angel Broker , Zerodha etc.
Jobber or Agent – A jobber is also a broker of a broker. Just as a common investor keeps in touch with the broker, in the same way a broker keeps in touch with the jobber. In other words, the jobber has no contact with ordinary investors.
It is appointed at the trading post in the stock exchange itself and from there does the work of buying and selling securities at low price differences. In Bombay Stock Exchange it is called Tarwani Wala . On the London Stock Exchange, it is called a market maker .
- If a company has a share capital of more than 3 crores in Bombay Stock, then it can appoint a jobber.
| SEBI – Securities and Exchange Board of India
The Securities and Exchange Board of India (SEBI) was established in the year 1988 as a non-constitutional body for the purpose of proper and necessary regulation of the Indian securities market.
However, it was given constitutional status by the SEBI Act, 1992. Its headquarter is in Mumbai. Apart from the chairman, the board of SEBI consists of nine other members.
Reason for the establishment of SEBI – The capital market witnessed an astonishing growth in the 1980s. With the ever-increasing number of investors and the expansion of market capitalization, companies, brokers and others involved in the securities market were found to be involved in a variety of criminal activities.
This tarnished the image of this market and investors’ confidence in it started waning. Keeping all this in mind, SEBI was formed.
Objective of SEBI – SEBI aims to create an environment through which proper planning of resources of the securities market is possible and its dynamism can be maintained. Simultaneously, it aims to catalyze competition and encourage innovations.
Functions of SEBI – According to the SEBI Act 1992, some important functions of SEBI are as follows –
1. It registers stock exchanges, merchant banks, mutual funds, brokers, registrars, transfer agents, etc.
2. It encourages education related to investing. Apart from this, it issues necessary guidelines from time to time and keeps an eye on the Indian securities market.
3. It investigates and audits the stock exchanges and other intermediaries concerned so that everything runs in an orderly and lawful manner.
Hope you have understood the stock exchange. In the next section, we will understand how the stock market works through some interesting examples –