National stock exchange despite a new player in the bourse business has taken the leap and today become the preferred exchange of traders and investors in India. Of course, this didn’t happen just by chance. Let’s understand the main reasons why is NSE more popular than BSE.
Stock exchanges are the lifeline of the stock market. They provide a platform for companies to raise funds for their business expansion. For traders/investors, they provide an opportunity to earn money. Securities and Exchange Board of India (SEBI) regulates the stock market in India. SEBI, through its 20 departments achieves its objective by enforcing bye-laws to all the entities of stock market including the financial intermediaries. Stock exchanges are also an entity of the stock market thus it is regulated by SEBI as well.
There were several stock exchanges in India but most of them exited the business after the guidelines of SEBI. You can read stock exchange history for your reference. Currently, there are seven active stock exchanges in India. Out of these, BSE and NSE are the leading ones.
Before digging into the reasons why NSE is the preferred stock exchange in India, let’s have a small recap of NSE and BSE.
Bombay Stock Exchange
First stock exchange in India was established within two decades after the first freedom fight erupted against East India Company. It was Bombay Stock Exchange (then named as The Native Share and Stock brokers Association) established in 1875 in Bombay (now Mumbai). Surprisingly it has not only survived but is one of the leading stock exchanges in India. Currently, it lists more than 5000 companies which are the largest in the world. BSE also claims to be the fastest stock exchange in the world with speed of 4 micro seconds. BSE has also several group companies which assist it to grow its business as well as transfer the technology to youngsters.
National Stock Exchange
Harshad Mehta scam became a reason to introduce a choice to the investors in context of the stock exchange. At that time BSE was the only major stock exchange in India. As a choice National Stock Exchange (NSE) was established in 1992. It got the approval of SEBI in 1993 and started functioning in 1994. NSE has several group companies for its assistance and to transfer the technology to the new generation. Currently around 1500 companies are listed on NSE.
Why is NSE more popular than BSE?
As mentioned above, BSE has over 5000 companies listed whereas NSE has just 1500. This variation in listed companies can be attributed to the fact that NSE is a very new entrant in the bourse business. But why NSE is preferred by traders/investors to BSE. Let’s find out why?
- Harshad Mehta Case
- Trading method
- Direct participation
Indian stock market collapsed after Harshad Mehta scam surfaced. Traders/investors didn’t trust stock market and it was BSE who lost its credibility. NSE was a new entrant, a fresh one. No judgements were attached to NSE, thus it was the only choice for investors.
Initially, investors inclined towards NSE because they didn’t trust BSE.
BSE used floor-trading method. In this process, brokers gathered in a ring inside the exchange and shout-out the stock prices. If an investor has to buy-sell, they need to call a sub-broker then it was communicated to someone else and finally reach to the exchange ring. It was up to the brokers how much live scenario they wanted to reveal to the investor. An investor used to know stock prices next morning in the newspaper. Brokers used to have a monopoly due to the black-boxed system thus used to earn more.
NSE with its introduction brought screen-based trading. No more shouting and chaos inside the stock exchange. Trading began very professionally and transparently. Later, NSE adopted internet and a person sitting at his/her home can see the stock price and make his/her own decision to buy-sell. No need to call someone and ask them to buy-sell on their behalf.
While BSE worked as a black-box, NSE brought transparency and rebuilt the trust of investors in the stock market.
BSE was way too orthodox and had monopoly mindset for the stock market. Only brokers could trade in the stock market. An investor had no direct interaction with the stock market. He/she only used to find the price in the newspaper and get tips from the broker and then invest the money through the broker.
NSE changed this situation by introducing technology. An investor can directly participate in the stock market. Of course, he/she needs to get a trading account which is provided by a broker. Apart from that, an investor has nothing to do with a broker. He/she can place his/her orders directly online. No more middleman, thus no more opaqueness.
BSE sensed this inclination of users towards NSE and adopted technology too, but it was too late.
NSE eliminated the monopoly of brokers in the stock market and allowed every eligible trader/investor to buy-sell directly.
As a convention in the stock market, investors who used to take delivery get the share certificate in a physical paper form at their mentioned address. There were plenty of problems with this situation viz.
- Certificate forgery
- Certificate Transportation
- Certificate misplacement
Companies used to get a loan from a bank against some stocks certificates and then get a duplicate certificate of same certificates and issue to buyers. It used to rotate to other buyers until company defaults the loan or the investor wanted to have his name on the certificate. Even in that situation, the broker (who introduced) used to be seen as the only culprit. In fact, he already used to know about that forgery. There were several cases of this forgery. In that situation either the investor again settles to rotate the certificate to next buyer or if he is rigid enough, he used to get the money back from the broker.
As the number of delivery trades increased, the number of physical shares to be sent to the investor also increased. There used to be a pile of physical certificates to be sent increasing the workload. This also increased certificate transportation charges.
When an investor used to receive a physical certificate, it becomes his/her sole responsibility to safeguard the certificates. It was the only proof that he/she bought the shares. In case they were misplaced or damaged, the further process to reclaim it was very difficult.
Following Depositories Act in 1996, NSE introduced National Securities Depository Limited (NSDL) as the first depository in India. Now share certificates were in dematerialized (demat) form. Demat form is an electronic format which is saved electronically with the depository.
NSE depository NSDL removed all the problems attached to a physical certificate. No more physical papers, no more worries.
I hope you are aware of all the stock market charges you pay while trading/investing. One of these charges is called the transaction charge. This charge is levied by the stock exchange. Read more about transaction charge.
BSE and NSE transaction charge is levied differently and these charges itself vary broker to broker.
Exempli Gratia for zerodha BSE charges Rs 3 for every trade turnover and NSE charges 0.00325 for the turnover. Thus, if you are placing a smaller trade on BSE you will pay more charge than NSE. But if your trade turnover is very high, NSE charge is more than BSE. Read more on the NSE, BSE charge difference for your reference.
Stock market runs on retail traders, who place trades of small turnover. Thus low charges of NSE for lower turnover trades are obviously better.
Liquidity means a chance of getting your stocks converted to cash.
If you want to sell the stocks of a company, how much it is possible that you will get a buyer. If there are more buyers who are willing to buy the same stocks you want to sell, it means that it has high liquidity. If you can’t find the buyers and got stuck with the stocks, it means that it has low liquidity.
NSE, despite having very few stocks listed as compared to gigantic BSE list, provides more liquidity for its stocks. This high liquidity is a plus point of NSE.
NSE stocks provide more liquidity than BSE, thus a better choice for investors.
Although NSE is a quite new entrant to bourse business as compared to BSE in India, however, it has won the trust of investors. NSE brought transparency to the stock market and direct participation of traders/investors. For retails traders, NSE transaction charge is quite low than BSE thus making it the preferred exchange in India.