The National Stock Exchange (NSE) is a leading stock exchange in India, playing a crucial role in the country's financial landscape. Established in 1992, the NSE has rapidly grown to become one of the largest and one of the most technologically advanced stock exchanges in the world. It serves as a platform for buying and selling various financial instruments, including equities, derivatives, currencies, and debt securities. The NSE's impact on India's economy, investment landscape, and financial markets is profound, making it an integral institution in the nation's journey towards economic growth and development.
What is NSE? (National Stock Exchange)
The National Stock Exchange (NSE), established in 1992 and headquartered in Mumbai, is one of India's largest stock exchanges. It pioneered electronic trading, significantly speeding up transactions and enhancing transparency. NSE offers a diverse range of financial products, including equities, derivatives, bonds, and exchange-traded funds (ETFs). Its flagship index, the NIFTY 50, tracks the performance of the top 50 companies across key sectors in India. Under the regulatory oversight of SEBI, NSE ensures a fair and secure trading environment. By promoting efficiency, transparency, and accessibility, NSE has played a pivotal role in modernizing the Indian financial market.
History and evolution
The NSE was founded as a result of the recommendations made by the Pherwani Committee in 1992. This committee was established to examine the feasibility of establishing a modern and technologically advanced stock exchange in India. The NSE officially commenced operations in 1994, with the launch of the wholesale debt market. This index comprises the 50 most actively traded stocks on the NSE and serves as a benchmark for the Indian equity market's performance.
One of the NSE's distinctive features was its adoption of a fully automated electronic trading system, which replaced the traditional open outcry system. This automation brought greater transparency, efficiency, and accessibility to the Indian financial markets. As a result, it quickly gained traction and emerged as a preferred platform for investors and traders.
How does the NSE stock exchange work?
Trading on the National Stock Exchange is led by market orders without interference from market makers or specialists. Trades are placed, processed, and completed via an electronic limit order book. Here, orders are matched by a trading computer. When a market order is placed by an investor, the electronic book matches it with a limit order. In this way, both buyers and sellers maintain anonymity in the financial market.
As this market is driven by orders and all trades are displayed in the trading system, it becomes a transparent avenue for investment. All the orders at the exchange are placed with the assistance of stockbrokers offering online trading facilities to investors. For a select few institutional investors, there is also a facility to directly place orders in the market. This is known as ‘direct market access’.
Equity trading on the NSE is open on weekdays and closed on Saturdays and Sundays. Trading is also closed on other holidays predetermined by the exchange. Trading is conducted in two sessions:
- Pre-opening: Some orders can be placed before the market opens. This is a brief window that opens at 9 A.M. sharp and closes at 9:08 A.M.
- Regular session: The regular time that the market opens is set at 9:15 A.M. and closes at 3:30 P.M.
Nifty50 is the most prominent index of the NSE. It covers approximately 63% of the total listed market capitalisation under the exchange. Nifty50 encapsulates stocks of companies from around 12 sectors.
Benchmark index of NSE
The benchmark index of the National Stock Exchange of India is the Nifty 50. It comprises of 50 well-established and liquid stocks from different sectors.
The NIFTY index utilises a methodology that is weighted according to the free-float market capitalisation. This implies that each stock's weight in the index is determined by its market capitalisation, but only the shares that are publicly available for trade are considered. These publicly available shares are known as free-float shares.
Functions of NSE
The NSE facilitates the trading of various financial instruments, each serving a specific purpose within the financial ecosystem:
- Equities: The National Stock Exchange provides a platform for trading shares of publicly listed companies. These equity shares represent ownership in the company and provide investors with the opportunity to participate in a company's growth and profitability.
- Derivatives: The NSE is a significant hub for trading derivatives such as futures and options contracts. These financial instruments allow investors to take a chance on the future price movements of underlying assets, manage risk, and engage in arbitrage strategies.
- Currency: The National Stock Exchange also offers currency trading, enabling participants to trade various currency pairs, including the Indian rupee against major international currencies like the US dollar, euro, and British pound.
- Debt Securities: The NSE facilitates the trading of debt instruments such as government bonds, corporate bonds, and other fixed-income securities. These instruments play a crucial role in capital raising and investment strategies.
- Exchange-Traded Funds (ETFs): ETFs, which track the performance of a specific index or sector, are also traded on the NSE. These funds provide investors with exposure to a diversified portfolio of securities.
Features of National Stock Exchange
Let us now take a closer look at the features of the National Stock Exchange:
1. Technology and innovation:
The NSE is renowned for its technological prowess and innovation in the financial sector. It introduced the NSE-IT (Information Technology) platform, which transformed the way trading is conducted in India. The exchange's high-speed trading infrastructure, robust risk management systems, and real-time surveillance capabilities have set new standards for efficiency and security.
2. Regulation and oversight:
The Securities and Exchange Board of India (SEBI), the country's primary regulatory authority for the securities market, oversees the NSE's operations. SEBI ensures that the exchange operates fairly, transparently, and in line with established rules and regulations. Additionally, the NSE itself plays a crucial role in maintaining market integrity by enforcing strict listing requirements, surveillance mechanisms, and investor protection measures.
3. Impact on India's economy:
The NSE has had a profound impact on India's economy and financial markets:
Capital formation: The exchange facilitates the flow of capital from investors to businesses, enabling companies to raise funds for expansion, research, and other growth initiatives.
Investor participation: The NSE has opened avenues for a wide range of investors, from retail traders to institutional investors, to participate in India's financial markets.
Modernisation of financial markets: The NSE's adoption of technology and electronic trading has paved the way for modernization and efficiency improvements within the broader financial sector.
Global integration: The NSE's diverse product offerings, including currency and derivative trading, have increased India's integration with global financial markets.
Market segments of National Stock Exchange (NSE)
NSE trades securities in Whole Sale Debt and Capital Market Segments.
1) Whole Sale Debt Market Division
The Wholesale Debt Market Division of the NSE provides a comprehensive trading platform for a variety of fixed-income securities.
2) The Capital Market Division
The Capital Market Division of the NSE facilitates trading in a broad range of securities, including debentures, equity shares, exchange-traded funds, preference shares, and retail government securities.
Investment segments
The National Stock Exchange offers three investment segments: equity, equity derivatives, and debt. Let us examine each segment below.
1. Equity
Equity is a comparatively volatile asset class that presents opportunities for investors in the market to maximise the returns from their investments. Equity investments could contain numerous assets, including mutual funds, indices, equities, IPOs, and ETFs.
2. Equity derivatives
There is a broad range of equity derivatives traded on the NSE. These include commodity derivatives, interest rate futures, currency derivatives, and international indices like CNX 500 and Dow Jones. Derivative trading on the NSE began in 2002 as index futures were launched. The exchange also listed derivative contracts on global indexes — Dow Jones Industrial Average and S&P 500, in 2011. With these steps, over time, the exchange has made tremendous progress in the equity derivatives segment.
3. Debt
The debt segment includes mutual funds and ETFs, with asset holdings ranging from corporate bonds (among other short-term and long-term bonds) to securitised products.
India’s first debt platform was launched by the NSE in 2013. It empowers investors with a liquid and transparent platform to invest in the debt segment.
4. Currency derivatives segment:
- Currency Futures: Investors can trade currency futures contracts, which obligate them to buy or sell a specific foreign currency at a predetermined price and date.
- Currency Options: Similar to stock options, currency options grant investors the right, but not the obligation, to buy or sell a foreign currency at a specific price within a given timeframe.
5. Debt segment:
- Government Securities (G-Secs): NSE provides a platform for trading government bonds, considered low-risk investments backed by the government.
- Corporate Bonds: Investors can trade corporate bonds issued by companies, which generally offer higher potential returns but also carry higher risk.
6. Mutual fund segment:
- NSE facilitates the purchase and redemption of mutual fund units, allowing investors to diversify their portfolios through professionally managed funds.
7. Initial Public Offerings (IPOs):
- NSE provides a platform for companies to list their shares through IPOs, giving investors the opportunity to invest in newly listed companies.
8. Exchange-traded funds (ETFs):
- ETFs are investment funds that track specific indices or commodities. They can be bought and sold on stock exchanges, offering investors a convenient way to diversify their portfolios.
9. Strategic financial products (SFPs):
- This segment includes structured products designed to meet specific investment goals or strategies.
NSE listing benefits
Listing with the National Stock Exchange (NSE) of India offers numerous advantages:
- Comprehensive visibility: The NSE's efficient trading system provides extensive trade and post-trade data. Investors can swiftly access top buy and sell orders and the total available securities, aiding in market depth assessment.
- Premier marketplace: High trading volumes on the exchange reduce impact costs for investors, enhancing trading affordability. The automated trading system ensures transparency and consistency, fostering investor trust.
- Largest exchange: With a market capitalisation exceeding $4.79 trillion (as of 06-May-2024), the NSE is India's largest exchange by trading volume, offering unparalleled market access and liquidity.
- Fast transactions: The NSE processes orders swiftly, enabling investors to secure optimal prices. For instance, on May 19th, 2009, it recorded its highest daily trades at 11,260,392, facilitating rapid transactions.
- Trade statistics: Listed companies receive monthly trade statistics, aiding in performance tracking.
- Easy to gauge the market depth: The NSE provides comprehensive information on trading activity, including the best buy and sell orders, the total number of securities available, and the top buyers and sellers. This detailed market data enables investors to gauge market sentiment and make informed decisions.
- Transparency: The platform's automated trading system and high trading volumes contribute to increased transparency. Investors can easily access real-time information on price movements, order books, and corporate announcements.
Additional read: Share Market Timings
Major indices on NSE
The NSE hosts several major indices representing different segments of the market, including:
- Nifty 50 index
- Nifty 100 index
- Nifty Next 50 index
- Nifty Midcap 50 index
- Nifty Smallcap 250 index
- India Vix index
In addition to these broad market indices, NSE also offers thematic, strategy, hybrid, and fixed-income indices, providing investors with diverse options to track market performance across various sectors and asset classes.
Why do companies list with NSE?
- Capital raising: Companies can raise capital by issuing shares to the public through an Initial Public Offering (IPO).
- Enhanced visibility: Listing on NSE increases the company's visibility and credibility, attracting a wider investor base.
- Liquidity: NSE provides a liquid market, enabling investors to buy and sell shares easily.
- Valuation: The stock price on NSE reflects the market's perception of the company's value.
- Regulatory compliance: NSE's stringent listing requirements ensure that listed companies maintain high standards of transparency and corporate governance.
The National Stock exchange of India limited trading process
The National Stock Exchange of India Limited utilises a market order-driven trading system, eliminating the need for market makers or specialists. When an investor places a market order, it is assigned a unique number and immediately matched with an existing limit order. The matching process is automated, and the identity of the buyer and seller remains anonymous.
If an immediate match isn't found, the order is added to an order book, prioritised by price and time. Orders with the best price are executed first, and for orders with the same price, the oldest order takes precedence.
This order-driven system offers transparency to investors by displaying all buy and sell orders on the system. Investors can access online trading platforms provided by brokers to place orders. The exchange operates five days a week, Monday to Friday, excluding holidays declared by the NSE.
Conclusion
The National Stock Exchange (NSE) stands as a testament to India's economic progress and its commitment to modernizing its financial markets. By providing a robust and technologically advanced platform for trading various financial instruments, the NSE has transformed the way investors, traders, and businesses engage with the Indian capital market. Its role in fostering liquidity, price discovery, and investor participation has been crucial in shaping India's financial landscape and positioning the nation as a prominent player in the global financial ecosystem. As India's economy continues to evolve, the NSE's significance is expected to grow, making it an essential institution for investors, regulators, and market participants alike.
