What is Stock Exchange? Meaning

Stock Exchange (also called Stock Market or Share Market) is one important constituent of capital market. Stock Exchange is an organized market for the purchase and sale of industrial and financial security. It is convenient place where trading in securities is conducted in systematic manner i.e. as per certain rules and regulations.

It performs various functions and offers useful services to investors and borrowing companies. It is an investment intermediary and facilitates economic and industrial development of a country.Stock exchange is an organized market for buying and selling corporate and other securities. Here, securities are purchased and sold out as per certain well-defined rules and regulations. It provides a convenient and secured mechanism or platform for transactions in different securities. Such securities include shares and debentures issued by public companies which are duly listed at the stock exchange, and bonds and debentures issued by government, public corporations and municipal and port trust bodies.

Stock exchanges are indispensable for the smooth and orderly functioning of corporate sector in a free market economy. A stock exchange need not be treated as a place for speculation or a gambling den. It should act as a place for safe and profitable investment, for this, effective control on the working of stock exchange is necessary. This will avoid misuse of this platform for excessive speculation, scams and other undesirable and anti-social activities.

London stock exchange (LSE) is the oldest stock exchange in the world. While Bombay stock exchange (BSE) is the oldest in India. Similar Stock exchanges exist and operate in large majority of countries of the world.

Definitions of Stock Exchange"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."

Features of Stock Exchange

Characteristics or features of stock exchange are:-1. Market for securities : Stock exchange is a market, where securities of corporate

bodies, government and semi-government bodies are bought and sold.2. Deals in second hand securities : It deals with shares, debentures bonds and such

securities already issued by the companies. In short it deals with existing or second hand securities and hence it is called secondary market.

3. Regulates trade in securities : Stock exchange does not buy or sell any securities on its own account. It merely provides the necessary infrastructure and facilities for trade in securities to its members and brokers who trade in securities. It regulates the trade activities so as to ensure free and fair trade

4. Allows dealings only in listed securities : In fact, stock exchanges maintain an official list of securities that could be purchased and sold on its floor. Securities which do not figure in the official list of stock exchange are called unlisted securities. Such unlisted securities cannot be traded in the stock exchange.

5. Transactions effected only through members : All the transactions in securities at the stock exchange are effected only through its authorised brokers and members. Outsiders or direct investors are not allowed to enter in the trading circles of the stock

exchange. Investors have to buy or sell the securities at the stock exchange through the authorised brokers only.

6. Association of persons : A stock exchange is an association of persons or body of individuals which may be registered or unregistered.

7. Recognition from Central Government : Stock exchange is an organised market. It requires recognition from the Central Government.

8. Working as per rules : Buying and selling transactions in securities at the stock exchange are governed by the rules and regulations of stock exchange as well as SEBI Guidelines. No deviation from the rules and guidelines is allowed in any case.

9. Specific location : Stock exchange is a particular market place where authorised brokers come together daily (i.e. on working days) on the floor of market called trading circles and conduct trading activities. The prices of different securities traded are shown on electronic boards. After the working hours market is closed. All the working of stock exchanges is conducted and controlled through computers and electronic system.

10. Financial Barometers : Stock exchanges are the financial barometers and development indicators of national economy of the country. Industrial growth and stability is reflected in the index of stock exchange.

WORKING OF A STOCK EXCHANGE

A stock exchange also referred to as a share market or bourse is a corporation or mutual organization that provides a platform for stockbrokers and traders to trade company stocks and other securities. They also play a role in the sense that they provide facilities for the issue and redemption of securities and other financial instruments and capital events also including the payment of income and dividends.

Shares issued by companies, unit trusts and other pooled investment products and bonds are the securities that are traded on the stock exchange. It is not possible to trade a certain security on a certain stock exchange if it has not been listed there. 

With the passage of time as modern markets are increasingly electronic networks, trade has become less linked to a physical place which might be at the most necessary for recordkeeping. These electronic networks have the advantage of speed and reduced transactions costs. Only members and stock and share holders can trade on the exchange.

The primary market is where the initial offering of stocks and bonds to investors is done and the subsequent trading takes place in the secondary market. There are many factors that affect the demand and supply in the stock markets which impact on the price of the stocks. 

With the passage of time as the world becomes a global village, many more stock exchanges are increasingly becoming a part of the global market for securities. 

A person or a company who buys and sells stocks on behalf of another person or a company while charging a commission on the sale and purchase of the stocks is called a stockbroker. He also acts as a useful bridge in linking up buyers and sellers. He also not only trades stocks on behalf of the clients but also can be approached for advice with regard to which stocks, mutual funds etc to buy. In fact, these days some brokers offer transaction services online in the form of a website interface offering commissions as low as one or two USD and fast transaction rates upto two seconds. Nowadays with the prevalence of automated stock broking systems on the internet, many a time the client has absolutely no personal contact with his stock broking firm because the system performs all the stock broking functions, obtaining the best price and

executing the trade. A lot of people seek the guidance of a broker and are prepared to pay for his services because they are more confident making major decisions about their finances while being advised by a licensed professional. 

The part of the capital market that deals with the issuance of new securities is called the primary market. The sale of new stocks or bond issues help companies, governments or public sector institutions obtain funding which is usually done through a syndicate of securities dealers. This process of the selling of new issues to investors is known as underwriting and if it is a case of a new stock issue, this sale is known as an initial public offering (IPO). 

The financial market for trading of securities which have already been issued in an initial private or public offering is called the secondary market whereas the market that exists in a new security just after the new issue is very often known as the aftermarket

Consequently, following the listing of the newly issued stock on a stock exchange, investors and speculators can trade on the exchange with ease as market makers provide bids and offers in the new stock.

Since securities are sold by and transferred from one investor or speculator to another, the secondary market should be highly liquid or transparent. Before the advent of technology, this liquidity was achieved by the regular meeting of the investors and speculators at a fixed place which is also how the stock exchanges originated. 

For the existence of an efficient and modern capital market, secondary markets are an important factor while also being an important bridge that links the investor’s desire for liquidity i.e. not to tie up his money for long periods with the capital user’s desire to be able to use the capital for an extended period of time. 

With the prevalence of a securitized loan or equity interest, the investor can sell his interest in the investment with ease, more so if the loan or ownership equity has been broken into relatively small parts. Secondary market trading is defined as the selling and buying of small parts of a larger loan or ownership interest in a venture. 

Traditionally under the usual lending and partnership agreements, the general practice for investors is to desist from sinking their money in long term investments and they are more likely to charge a higher interest rate or demand a greater share of profits in case they do agree but in the case of secondary markets, investors can recover their investments quickly if there is a change in their own circumstances.

Trading Mechanism in IndiaTrading at both the exchanges( NSE BSE) takes place through an open electronic limit order book, in which order matching is done by the trading computer. There are no market makers or specialists and the entire process is order-driven, which means that market orders placed by investors are automatically matched with the best limit orders. As a result, buyers and sellers remain anonymous. The advantage of an order driven market is that it brings more transparency, by displaying all buy and sell orders in the trading system. However, in the absence of market makers, there is no guarantee that orders will be executed.

All orders in the trading system need to be placed through brokers, many of which provide online trading facility to retail customers. Institutional investors can also take advantage of the direct market access (DMA) option, in which they use trading terminals provided by brokers for placing orders directly into the stock market trading system.

Settlement Cycle and Trading Hours

Equity spot markets follow a T+2 rolling settlement. This means that any trade taking place on Monday, gets settled by Wednesday. All trading on stock exchanges takes place between 9:55 am and 3:30 pm, Indian Standard Time (+ 5.5 hours GMT), Monday through Friday. Delivery of shares must be made in dematerialized form, and each exchange has its own clearing house, which assumes all settlement risk, by serving as a central counterparty.

Market Indexes

The two prominent Indian market indexes are Sensex and Nifty. Sensex is the oldest market index for equities; it includes shares of 30 firms listed on the BSE, which represent about 45% of the index's free-float market capitalization. It was created in 1986 and provides time series data from April 1979, onward.

Another index is the S&P CNX Nifty; it includes 50 shares listed on the NSE, which represent about 62% of its free-float market capitalization. It was created in 1996 and provides time series data from July 1990, onward

Market Regulation

The overall responsibility of development, regulation and supervision of the stock market rests with the Securities & Exchange Board of India (SEBI), which was formed in 1992 as an independent authority. Since then, SEBI has consistently tried to lay down market rules in line with the best market practices. It enjoys vast powers of imposing penalties on market participants, in case of a breach