Functions of stock exchange
Stock exchanges play a pivotal role in the economic landscape, serving as:
- Economic indicators: They reflect the overall health of an economy, tracking fluctuations in share prices.
- Security valuation: They facilitate the valuation of securities based on market supply and demand, aiding investors, creditors, and governments.
- Transactional safety: They ensure secure transactions by listing securities only after rigorous verification of companies' financial health and adherence to regulatory standards.
- Economic growth catalysts: They provide a platform for capital formation through continuous disinvestment and reinvestment, fostering economic growth.
- Public awareness and education: They disseminate information about equity investments and encourage participation through new issue offerings.
- Market liquidity: They ensure a vibrant market for buying and selling securities, offering investors confidence in the liquidity of their investments.
- Efficient capital allocation: They enable profitable companies to raise capital, promoting efficient allocation of resources.
- Investment and savings incentives: They offer attractive investment options with potential for higher returns compared to traditional assets like gold and silver.
Benefits of listing with a stock exchange
Listing on a stock exchange offers several key advantages for companies, investors, and the public. Here’s a breakdown of its benefits:
Increased value
Listing enhances a company’s credibility and perceived value. It provides a platform for the company to expand its shareholder base, fostering a positive reputation and potentially increasing its market worth.
Access to capital
Companies listed on a stock exchange can access capital more readily by issuing shares. This avenue often proves more cost-effective, allowing companies to sustain operations and fuel growth through funds raised from the public.
Collateral value
Listed securities are widely accepted as collateral by lenders. This increases a company’s ability to secure credit quickly and efficiently, as listed entities are generally viewed as more trustworthy.
Liquidity
Listing improves liquidity, enabling shareholders to buy or sell shares easily. It offers shareholders marketability, allowing them to track their investments’ value and to capitalise on value appreciation.
Fair price
Listed securities reflect fair market prices, influenced by supply and demand and disclosed transparently. This ensures investors can trade at rates aligned with the true market value, enhancing trust in the investment process.
Investment methods
As an investor, you can invest in the stock market in India in one of the following ways:
- Through the primary market: A primary market is where stocks and bonds are issued and sold for the first time. It acts as a platform where companies can create and list their initial public offerings (IPO), and retail investors can acquire the floated stocks.
- Through the secondary market: A secondary market is one where you can buy and sell securities already listed on the stock exchange. It is a trading platform where investors can trade previously issued securities among themselves without the issuing company getting involved in the trade. Depending on the type of stocks trading, secondary markets can be further subdivided into Auction and Dealer markets.
Major stock exchanges in India
Understanding what is a stock exchange is not enough. You also need to know what the main stock exchanges are in India. There are two major stock exchanges in India, and here’s a brief overview of both:
1. Bombay Stock Exchange (BSE)
The BSE was established in 1875 and remains the oldest stock exchange in Asia. Located in Dalal Street, Mumbai, BSE is the world’s 9th largest stock exchange. In 2015, the BSE clocked a median trade speed of 6 microseconds, becoming the fastest stock exchange in the world. As of 8th May 2024, BSE’s estimated market capitalisation stands at Rs. 43,024,731.39 crore ($5.15 trillion). Over 5,000 companies are listed on the BSE. This stock exchange is known for the Sensex Index, which is a benchmark index tracking 30 of the most well-established and financially sound companies on the BSE.
2. National Stock Exchange (NSE)
Incorporated in 1992 and opened in 1994, NSE is a leading financial exchange in India with headquarters in Mumbai. It is famous for being the first Indian exchange to implement electronic or screen-based trading in the country. NSE provides a crucial platform for trading various financial instruments, including equities, derivatives, and currency futures. The estimated market capitalisation of the National Stock Exchange surpassed $4 trillion (Rs. 334.72 trillion) in January 2024. NSE also pioneered index-based trading in India with the launch of its flagship index, the NIFTY 50, which tracks 50 stocks from 13 sectors of the economy, serving as a major benchmark for the Indian equity market.
Conclusion
Stock exchanges play a vital role in shaping the economic development of a country by facilitating capital formation and liquidity. They help companies raise funds for expansion and growth while offering investors opportunities to grow their wealth with stocks for intraday trading and long-term trading. Stock exchanges also help serve as barometers of a country’s economic health by communicating market sentiments and trends via index movements.
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