What is a stock exchange? Definition, functions, and benefits

The term “stock exchange” immediately springs to mind when discussing trading or investing. A stock exchange meaning is nothing but a platform where retail investors, the public in general, and institutional investors can buy or sell shares of a listed company.

A particular company can sell shares through an OTC (over-the-counter) transaction as well, but that is mostly done privately or via a broker. When the company raises capital from the public, its shares get listed on an exchange like the NSE (National Stock Exchange) or BSE (Bombay Stock Exchange) in India.

That said, let’s understand the concept of the stock exchange for beginners, how they operate, their role in the economy, and the major exchanges in the country. 

What is a stock exchange?

In a capital market, a stock exchange plays a crucial role by offering traders and investors a safe place to put their money in a systematic way. A stock exchange helps individuals trade or invest in listed companies. Despite its name, people can also invest in commodities (gold, oil, etc.), bonds, currencies, and other financial instruments.

Before the digital breakthrough took place, trading and investing used to take place manually at the exchanges. Today, contemporary exchanges function by electronically handling, placing, and executing orders. Now, when you place an order, it automatically matches the share price, and upon matching, the order gets executed. The stock exchange timings in India take place from 9.15 in the morning to 3.30 in the afternoon, every Monday to Friday.

The Securities and Exchange Board of India (SEBI) governs the whole structure and functioning of the Indian stock market. In India, the Securities and Exchange Board of India Act, 1992 designates SEBI as the market regulator. As of March 2024, the NSE holds the 6^th position, followed by the NYSE, NASDAQ, Euronext, Japan Exchange Group, and Shanghai Stock Exchange.

Source: Statista

Functions of a stock exchange 

The exchanges perform multiple functions, each crucial for the Indian economy’s health and investor interest.

• Economic indicator

A stock exchange is like a beat of the economy that accurately describes the economic status. It keeps track of all share price movements, whether significant or slight.

• Helps in economic growth

Since these exchanges provide a platform to invest, reinvest, and disinvest, this generates multiple opportunities for capital formation and eventually helps the economy grow.

• Liquidity facilitation

The primary responsibility of an exchange is to provide a ready venue for the sale and purchase of securities. This reassures investors that their current investments may be turned into cash; to put it another way, exchanges provide investment liquidity.

Benefits of Stock Exchanges

• Offers security to investors and company interest

Since these are centralised platforms, it is simpler to impose regulations on transactions that take place on the stock exchange. For instance, in a decentralised share trading system, it would be very hard to guarantee that margin payments in stock trading are made on schedule. This would have resulted in a lack of confidence between businesses and investors, raising the cost of transactions for all parties involved, and creating needless delays and legal disputes.

• Effective equity trading

As we mentioned above, because investors may more readily purchase and sell shares on stock exchange platforms than in a decentralised system, stock exchanges provide better liquidity to investors.

• Reduced reliance and easy access to capital

Companies can raise money without having to expend time and resources presenting their shares to individual investors by listing on the stock market. Moreover, the price of a company’s stock cannot be excessively influenced by a single investor since publicly traded stocks are more influenced by supply and demand in the market.

• Better reputation

Listing on the stock market can occasionally help a lesser-known business become much more well-known to the public. As a result, it may be easier for it to increase its market capitalisation. Moreover, the company is eligible to use its publicly listed shares as collateral to get debt from financial institutions.

Stock exchanges in India

India’s history in the stock market goes back to 1875, when the Bombay Stock Exchange was created under a Banyan tree in today’s Mumbai and is the oldest one in India and Asia. On the other hand, the National Stock Exchange (NSE) was founded in 1992 and was the first to introduce dematerialised trading in 1996.

There are additional stock exchanges in India outside the NSE and BSE, such as the Calcutta Stock Exchange and the Metropolitan Stock Exchange of India, in addition to regional stock markets.

Stock exchanges and the economy 

Now that we have a clear idea of the stock exchanges in India, let’s discuss how they take part in the economy.

Promotes company growth

Through the stock market, businesses may raise capital from the public on an equal basis. The capital raised by corporations via initial public offerings (IPOs) is used to support international corporate growth. Businesses can ask for investments against their shares by listing them on the stock market.

Foster transparency

For stock investors all around India, an exchange provides a strong foundation. Traders may easily invest in some of the largest businesses in the world via an exchange. Investors may follow their stocks, earnings, and market trends on these centralised exchanges, which guarantee safe and transparent trading.

Encourages investments

For investors and companies alike, an unregulated financial market brings unnecessary risks. In India, SEBI and these exchanges collaborate to offer a safe environment and system to encourage investors to participate in the stock market.

Conclusion 

Investing or trading on a stock exchange in India requires a stockbroker like Dhanush to help you access stocks along with multiple securities like bonds, commodities, and currencies.

They function as a comprehensive one-stop platform with their user-friendly, transparent, safe, and investor-focused operational systems. By making wise investments, one may earn passive income from these SEBI-regulated companies in a secure manner.

Dhanush by Ashika Stock Broking Ltd. is one of the top trading apps in India, offering a diverse range of products and insights to both beginner and seasoned investors. From data-driven research, competitively priced products, and the Ashika Group’s 30 years of expertise, Dhanush has a lot to offer for every investor’s needs.