Stock exchange and its

functions
Dr Mallika Ahuja
Meaning

 A stock exchange or securities exchange is an organized financial market where

traders trade in securities. In these exchanges, the issue and redemption of securities
are also performed. Stock exchanges function as ‘continuous auction’ markets where
traders consummate transactions through electronic trading platforms. It is a stock
market where listed securities of companies, government, and semi-government
organizations are traded.
History of stock exchange in India
History of stock exchange in India

1830s: During this decade, corporate shares started being traded in Mumbai. Most notably, stocks of banks
and cotton presses were traded during this time.
1850s: The first version of a stock exchange came into existence during this decade. It started with a group
of brokers finding a location in Mumbai’s Horniman Circle.
1874: As more brokers jumped onto the bandwagon in downtown Mumbai, Dalal Street was born. Today,
Dalal Street has become a metonym for the entire Indian financial sector, much like Wall Street is in the US.
1875: The small group of brokers formed ‘The Native Share & Stockbrokers Association’ that is today known
as the BSE (formerly Bombay Stock Exchange).
Over the late 19th and early 20th century, exchanges cropped up at Ahmedabad, Calcutta (now Kolkata) and
Madras. But BSE remained the dominant exchanged, as it was located in Mumbai, which had emerged as the
country’s leading commerce hub. And yet, trading in stocks remained restricted to a limited group of people.
1956: India passed the Securities Contracts Regulation Act, which formalised stock trading.
 1964: The newly-created UTI launched India’s first mutual fund scheme, the US 64. The scheme raised Rs
6,400 crore by 1988, making UTI the big player in the Indian market.
History of stock exchange in India

1977: Dhirubhai Ambani’s Reliance Industries, with interests in textiles and petrochemicals, listed. The IPO
garnered huge interest from retail investors kickstarting the ‘cult of equity’.

1986: On 1st January this year, BSE SENSEX, a 30-share index was established. This was the country’s first
equity index with base year as 1978-79 and base value of 100.

1988: This period was marked by a lack of transparency and undependable clearing and settlement
systems; making it imperative to set up a financial market regulator. Hence, the Securities and Exchange
Board of India (SEBI) was established. However, it was not until 1992 that it was granted statutory power.

 1992: The National Stock Exchange of India Limited (NSE) was established. It was around the same
time that interest in stock market spiked sharply, thanks to the bull market led by Harshad Mehta.
History of stock exchange in India

1994 : NSE became the first Indian exchange to provide a modern, fully automated screen-based electronic trading
system.

1996: The NSE launched Nifty 50 index on April 22 this year. The Nifty 50 is a benchmark Indian stock market index
that represents the weighted average of 50 of the largest Indian companies listed on the National Stock Exchange.

Earlier, the Nifty 50 index was calculated based on full market capitalisation methodology. However, after June 26,
2009, the computation was changed to a free-float methodology. The base period for the Nifty 50 index is
November 3, 1995, and the base value of the index has been set at 1,000.

 It’s been a long journey but today India is among the top five stock markets in the world by market
capitalisation. It has been among the most well-performing markets of the world. For instance, the Sensex has
grown at a CAGR of 15% over the past 20 years and 16% since inception.
Number of stock exchange in India
currently

After independence, 23 stock exchanges were added to compete with BSE. However, in 2012 SEBI said that stock
exchanges whose net worth was less than Rs 100 crore and turnover less than Rs 1,000 crore will be closed by 2015.

At present, there are only seven recognised stock exchanges in India.

BSE
NSE
Calcutta Stock Exchange
Magadh Stock Exchange
Metropolitan Stock Exchange of India
India International Exchange (India INX)
 NSE IFSC
Functions of stock exchange

Determining the security prices

 One of the main functions of stock exchanges is determining the prices of securities.
Since the stock exchange operates on the demand and supply of securities, this
concept is leveraged for determining the prices on a continuous basis. Speculation
accelerates this demand and supply in the market. The securities that are growth-
oriented and profitable have a higher value. Based on this valuation of securities,
investors and traders can assess and determine the security that will give them the
most returns on investments.
Functions of stock exchange

Maintaining Liquidity
One of the most important functions of stock exchange is maintaining liquidity. As securities
can be easily sold and bought on an exchange, there is a higher probability of converting them
into cash. This function allows investors to stay confident about trading in the stock exchange.

3. Indicating the Economic State

 Stock exchanges can very effectively indicate the economic state of the country. Traders can
identify the industries that are growing and that are seeing a downfall. On a macro level, you
can identify sectors that are booming. At a micro level, you can identify the particular
companies that are facing losses. Overall, the entire picture of an economy can be
understood through the situation of a stock exchange
Functions of stock exchange

Facilitating investments
 Stock exchanges function according to the guidelines of regulatory bodies such as SEBI
in India. Due to the presence of a regulatory bodies, investors and traders feel safe
investing in this market. This facilitates the culture of investment since a great amount
of profits can be earned through trading in the stock exchange. In fact, long term
trading can help in compounding your money.
Functions of stock exchange

Raising capital
For companies, an important function of stock exchange is raising capital. With an increase
in the security prices, companies can raise capital to fund their business operations and
projects. This helps in the growth of industries within the country. Many companies can
even come back from losses by raising capital from traders in the stock exchange.

6. Building a healthy economy

 Investors and companies together build their corpus through stock exchange. This is an
important function of stock exchange. While companies are the most profitable among
other market players, individual investors also make huge profits in the exchange.
However, it is noticeable that there is an equal chance of profit as well as loss.
Functions of stock exchange

Providing rights to investors

Through the stock exchange, traders invest in equity shares which enable them with voting rights. As the number
of shares goes up, traders get the right to vote and also get a part in the profit earned by the company. The more
an investor gets the hold on the number of share, the more is their ownership in the company.

8. Attracting foreign investments

One of the important functions of stock exchange is attracting funds from foreign entities. This increases the
influx of the capital within the national market which in turn, increases the opportunity to earn more.

9. Security of Transactions
 The companies listed on the stock exchange have to undergo scrutiny before they are listed on the exchange.
These listed companies have to operate under strict regulations due to which investors can trust the company.
Functions of stock exchange

10. Speculation of Securities

 Stock exchanges allow speculation of securities based on supply and demand. This is
done in a healthy manner. The security offered by profitable businesses is valued
higher. A company with a low reputation may suffer from the risk of a lower valuation.
Features of stock exchange

Following are the features of the Stock Exchange:

Within the stock exchange, second-hand securities associated with shares and bonds that are
preannounced by the company are traded.
Stock exchange is a comprehensive financial market where government, semi-government and
corporate company securities are traded.
Securities can be traded and transacted only through authorized brokers and members on the
stock exchange.
All securities at the stock exchange are regulated by SEBI guidelines and are controlled by
exchange rules.
 Only those securities listed on the stock exchange can be traded.
List of popular stock exchange in
the world

Below is the list of the most popular stock exchanges in the world.

NYSE: This is the world’s largest stock exchange in the world in terms of the market capitalization of listed
companies.
Nasdaq: This is another American stock exchange that is considered to be the second largest in terms of the
market capitalization of the traded shares.
NSE: National Stock Exchange is the leading exchange that is the fourth largest in the world according to
trading volume.
BSE: Bombay stock exchange is the tenth oldest stock exchange in the world, with more than 6000 companies
listed in it.
 LSE: London Stock Exchange is the main stock exchange of the United Kingdom. Within this exchange, FTSE
200 index is the dominant index. It has now merged with Milan Stock Exchange, the Borsa Italiana, to form
London Stock Exchange Group.
Importance of Stock Exchange

A stock exchange is a marketplace filled with the opportunity of investing for traders.
One of the important roles of stock exchange is to grow their funds. With proper study
and analysis, they can get huge positive returns on investments. Profits through
trading are much higher than any other investments. However, there is an equal risk
probability. Not only do individual investors multiply their funds in the stock exchange,
but also huge organizations also raise capital to fund their operations. Overall, a
healthy and operational stock exchange can stabilize the economy and increase
liquidity in the market.