Financial market is a money-driven eco-system and the stock market is a subset of this evergreen eco-system. Where money involves, scams emerge as a by-product automatically. India also saw a sudden increase in scams in the financial market, leading to loss of huge money of investors as well as security-issuers. The idea of a stock exchange was brought to establish credibility of the stock market to security issuers and traders/investors. Let’s understand what is stock exchange.
Stock market is a platform where a company and an investor both get a chance to increase their capital. Primary market provides a legal platform for a company to raise funds by issuing an IPO while on the other hand, secondary market offers a platform for traders/investors to earn money by exchanging securities and derivatives of the same company.
A stock broker is a corporate entity which is a gateway to enter the stock market. It is one of the four financial intermediaries of the stock market. To buy-sell a security or a derivative you need to have a trading account which is provided by a broker. You can choose a full-service broker or a discount-broker.
What is Stock Exchange?
The Indian Securities Contracts (Regulation) Act of 1956, defines Stock Exchange as
“An association, organization or body of individuals, whether incorporated or not, established for the purpose of assisting, regulating and controlling business in buying, selling and dealing in securities.”
Buying-selling of stocks and its derivatives are done at a platform called as a stock exchange which is a private entity. You can visualize stock exchange as a shopping mall, where lots of shopkeepers are selling the same product of the same brand. Their selling price may differ based on discounts and other priorities. MRP products are readily available but products with a discount may take some time. Four scenarios can be considered while buying the product-
- You may choose to buy a discount offer from a seller, but that discount product is not available at that very moment.
- The second scenario is your capital (money) availability. Even after discount price, you may not be in the position to buy the product and want to wait for better discount another day.
- In the third scenario, your capital allows you to buy the product at MRP but you want to get at a discount rate.
- In the fourth scenario, you don’t wait for the discount product and buy it at MRP.
Same scenarios happen in stock exchange. Replace the shopkeepers by the sellers, selling the securities at different prices. You buy the security or derivatives at a price you feel comfortable. On the stock exchange, you can be the buyer and the seller both, for securities and its derivatives. Sell-buy price is not set by the company instead, it is enforced by the demand-supply mechanism.
Who regulates stock exchange?
There is always a scope of scam everywhere and the stock market is not an exception. Since its inception in the 18th century in India, lots of investors lost their money due to various malpractices and opaqueness of the process. This gave birth to lots of myths and fears which even today are so strong that lots of people don’t dare to enter the stock market. FundsBase is glad that it has busted those stock market fears successfully. Although the establishment of a stock exchange reduced scams to an extent still there were loopholes which were exploited by the scammers. Union Government of India passed SEBI Act in 1992. On 12 April 1992, SEBI became an autonomous body to regulate the Indian financial market. After SEBI got statutory powers, it enforced bye-laws to financial intermediaries which brought credibility and more transparency to Indian financial market.
Functions of Stock Exchange
There are two major stock exchanges in India viz. NSE and BSE. Of these two, NSE is the stock exchange with most companies listed on. There are 5 most important functions of stock exchange viz.
- Provide transparent platform for security issuers
- Evaluation of securities
- Provide healthy environment for investors
- Provide liquidity for securities
- Encourage more savings
Every startup needs funds to expand itself. First, they take the help of promoters. After some years, if they still require more funds for their expansion, they can go public. A company issues Initial Public Offering (IPO) in the primary market. Investors buy these IPOs and company gets funds for its expansion.
When a company decides to go public, the exchange follows a norm which leads to the pricing of the IPO. Company’s shares are offered to the public at this evaluated price.
Even in the secondary market, the stock price is enforced by the demand and supply mechanism.
Just like security issuers raise funds in the primary market, a trader/investor take advantage of the fluctuations of the stock price in the secondary market and earn money. This buy-sell process also keeps the stock market alive and healthy. To protect any damage to the investor, exchanges have applied the circuit breaker as directed by SEBI. These circuit breakers halt the trading on particular scrip or whole market for some hours or for the whole day, in case a sudden huge fluctuation breaks the pre-defined threshold called circuit.
When a trader/investor takes advantage of fluctuations in the stock price of a scrip, he/she earns money. The stock exchange makes sure that the scrip is liquid so that an investor can convert his/her investment in cash anytime, he/she wants. Involvement of domestic institutions (big financial entities e.g. LIC, banks) in the stock market makes sure that fluctuation will provide liquidity to the market.
Various mutual funds, SIPs and other schemes offer the investor more saving options than just saving in the bank. Thus an investor has more saving options to explore and find the best one as per his/her needs.
Importance of stock exchange
Stock exchange plays a vital role in a country’s economic growth. Let’s have a look how stock exchange contributes towards a country’s growth.
- Economic barometer
- Help security issuer and Investors
- Opportunities for new corporate entities
- Facilitate government to raise funds
- Contributes to economic growth
Major stock exchanges in India NSE-BSE have their own index Nifty and SENSEX respectively. These indexes are designed by respective exchanges as a collective measure of fluctuation in selected listed companies. Fluctuation of these indexes represents the economic graph of the exchange and country’s economic policies as a whole. Thus a -ve red graph represent an economic downfall whereas a +ve green graph represents economic growth.
Apart from these indexes, graphs of a sector also indicate how government economic policies are working in that sector.
An individual company’s graph indicates its own economic health.
Primary markets provide a legal platform for security issuers to raise funds for their expansion. In secondary market an investor can take advantage of market fluctuations and earn money.
After SEBI allowed discount brokerage in India, it’s easier to register as a brokerage and bring some fresh air to the financial eco-system. The discount brokerage has also motivated more people to start trading/investing because of their low brokerage system.
The government can take help of the stock exchange to raise public debt easily and quickly.
By helping a company to raise funds and investors to earn money, stock exchanges contribute towards a nation’s overall economic growth. It also offers more beneficial saving options than the conventional ones.
History of stock exchange in India
Indian stock market is one of the oldest stock markets in Asia. To understand how stock exchange came into existence, you need to understand the trade evolution in India.
In the 18th century, the concept of stock market came into existence in India, when East India company started transactions of loan securities. In 1830s trading of stocks in corporate, banks and cotton presses started. Though the trading was broad, the brokers who were involved were merely half a dozen till 1850.
During mid-1850 a group of 22 stock brokers used to meet and trade under a banyan tree, opposite Town Hall of Bombay. This small group of brokers gradually increased to 250. In 1875, this group established itself as “The Native Share and Stockbrokers Association”.
On August 31, 1957, Union Government of India recognized the Bombay Stock Exchange as the first Stock Exchange in the country under the Securities Contracts (Regulation) Act.
BSE is oldest stock exchange in Asia. It claims to be the world’s fastest stock exchange with the speed of 6 micro seconds.
Another major stock exchange in India is the National Stock Exchange of India Ltd (NSE) which was started in 1992. NSE is the first stock exchange in India to start operating on a completely digital framework. Currently, NSE is the largest stock exchange in India.
Regional Stock exchange (RSE)
After BSE was established, lots of regional stock exchanges emerged which traded for local/regional stocks. As per a circular issued by Ministry of Finance, Government of India vide F. No. 14 (2)/SE/85 dated September 23, 1985, imposed a requirement to all then listed companies to register themselves at the regional stock exchanges of their area as well. At that time there was no technological advancement thus these regional stock exchanges served both company and the investors well. Gradually, as the technology was developed and NSE-BSE started operating nation-wide using digital platforms, mandatory listing on these regionals exchanges seemed to be an added burden for the listed companies. SEBI issued, SEBI (Delisting of Securities) Guidelines, 2003 vide circular SMD/Policy/Cir-7/2003 dated February 17, 2003. As per this circular listed company was given a choice to list itself or not on regional stock exchanges. Companies chose to get listed on NSE, BSE as traders/investors can access them nation-wide using the digital platform. Listing on NSE, BSE brought more liquidity to stocks than listed on regional stock exchanges.
Below table lists how many stock exchanges in India established, in chronological order
|Sr No||Stock Exchange||Date Established|
|1||Bombay Stock Exchange||1875|
|2||Ahmedabad stock exchange||1894|
|3||Calcutta stock exchange||1908|
|4||Madhya Pradesh Stock Exchange||1919|
|5||Madras stock exchange was started.||1920|
|6||Meerut Stock Exchange||1956|
|7||Lucknow City Stock Exchange||1960|
|8||Cochin stock exchange||1978|
|9||Pune stock exchange||1982|
|10||UP Stock Exchange||1982|
|11||Ludhiana Stock Exchange Association||1983|
|12||Mangalore Stock Exchange||1984|
|13||Magadh Stock Exchange Association Ltd (MSEA)||1986|
|14||Saurashtra Kutch Stock Exchange||1989|
|15||Vadodara Stock Exchange||1990|
|16||Over The Counter Exchange of India (OTCEI)||1990|
|17||National Stock Exchange of India||1992|
|18||CG Stock Exchange||1995|
|19||Inter-connected Stock Exchange Ltd (ISE)||1998|
|20||The Metropolitan Stock Exchange (MSE) (formerly MCX stock exchange)||2008|
|21||United Stock Exchange of India||2010|
|22||India International Exchange (India INX)||2016|
|23||NSE IFSC Ltd.||2016|
Stock exchanges’ exit by SEBI
As per SEBI norms, a stock exchange, whose annual trading turnover on its platform is less than Rs 1,000 crore, can apply for voluntary surrender of recognition and exit, while an exchange which fails to achieve a turnover of Rs 1,000 crore, would be subject to compulsory exit process. This and several other reasons have resulted in a closure of lots of stock exchanges (mostly regional stock exchanges) in India.
Below table gives the detail of exchanges who exited and the respective SEBI order date
|Sr No||Stock Exchange||Exit Date|
|1||The Hyderabad Securities and Enterprises Ltd
(erstwhile Hyderabad Stock Exchange)
|January 25, 2013|
|2||Coimbatore Stock Exchange Ltd||April 3, 2013|
|3||Saurashtra Kutch Stock Exchange Ltd||April 5, 2013|
|4||Mangalore Stock Exchange||March 3, 2014|
|5||Inter-Connected Stock Exchange of India Ltd||December 08, 2014|
|6||Cochin Stock Exchange Ltd||December 23, 2014|
|7||Bangalore Stock Exchange Ltd||December 26, 2014|
|8||Ludhiana Stock exchange Ltd||December 30, 2014|
|9||Gauhati Stock Exchange Ltd||January 27, 2015|
|10||Bhubaneswar Stock Exchange Ltd||February 09, 2015|
|11||Jaipur Stock Exchange Ltd||March 23, 2015|
|12||OTC Exchange of India||March 31, 2015|
|13||Pune Stock Exchange Ltd||April 13, 2015|
|14||Madras Stock Exchange Ltd||May 14, 2015|
|15||U.P. Stock Exchange Ltd||June 09, 2015|
|16||Madhya Pradesh Stock Exchange Ltd||June 09, 2015|
|17||Vadodara Stock Exchange Ltd||November 09, 2015|
|18||Delhi Stock Exchange Ltd||January 23, 2017|
Stock Exchanges listed on SEBI website
Today as of writing this article the stock exchanges listed on SEBI website are given below. Visit SEBI website for direct access.
|Sr No.||Stock Exchange||Valid Upto|
|1||Ahmedabad Stock Exchange Ltd.||PERMANENT|
|3||Calcutta Stock Exchange Ltd.||PERMANENT|
|4||India International Exchange (India INX)||Dec 28, 2018|
|5||Magadh Stock Exchange Ltd.||PERMANENT
(renewal refused by SEBI)
|6||Metropolitan Stock Exchange of India Ltd.||Sep 15, 2018|
|7||National Stock Exchange of India Ltd.||PERMANENT|
|8||NSE IFSC Ltd.||May 28, 2018|
Stock exchange timings
Indian stock exchanges open for trading on all scrip at 09:15 and close at 15:30 IST. It remains closed on weekends and officially declared holidays in stock exchange for the calendar year.
Before 09:15 there is a pre-market session of 15 minutes on both NSE and BSE. In this pre-session, only SENSEX and Nifty 50 scrips can be traded in pre-market session. At 09:15 (after pre-market session) trade on all scrips start.
This 15 min pre-market session is divided into three parts viz. 8 + 4 + 3 minutes
- First 8 minutes
- Second 4 minute
- Third 3 minutes
During the first 8 minutes an order can be placed/modified/cancelled based on which the opening price of the scrip is decided. Orders cannot be placed after this first 8-minute in the pre-market session. Limit orders get priority over market orders and all the orders are enforced to disclose the full quantity.
During this 4 minutes orders are matched, the executable price is discovered and trades are confirmed.
This 3 minute is a buffer period to transmit from pre-market session to open market session.
BSE is the oldest stock exchanges in India which was established in 1875. After that, lots of regional stock exchanges established but as the technology advanced and NSE, BSE got digital frameworks, regional stock exchanges had to exit. Currently, NSE is the leading stock exchange in India.
Stock exchanges help to build a country’s economy by providing security issuer a legal platform to raise funds, while on the other hand, the investor gets the platform to earn money by taking advantage of the price fluctuations. Exchanges also provide more beneficial saving options as compared to the conventional ones.
Currently there are 7 stock exchanges active in India as per SEBI website.