BAJAJ BROKING
September 19, 2024
4 mins read
A stock exchange is an essential part of the financial system of a country. An exchange allows companies to raise capital, which they use to grow and expand. It allows investors and traders to buy and sell securities, thereby providing a mechanism for price discovery. Besides, as all transactions are mediated, a stock exchange is more transparent than an over-the-counter market. When a company raises funds through a stock exchange, it improves its reputation. Last but not least, a stock exchange also acts as a barometer for an economy.
A stock exchange is where all kinds of investors and traders go to buy and sell securities. It is a place where companies go to raise capital. By allowing people to trade in securities, an exchange provides a mechanism for price discovery. Besides, a well-run stock exchange is a barometer of an economy. Read this blog, as it explains the meaning of stock exchange, how such exchanges work, and benefits of stock exchanges for investors and companies.
A stock exchange is a place where shares of publicly listed companies and bonds are purchased and sold. A stock exchange can exist as a physical marketplace. It can also exist online, wherein people have to just log in to their demat account using their laptop or mobile phone to buy and sell securities.
A stock exchange is quite different from an over-the-counter market (OTC). In a stock exchange, the buying and selling of securities is mediated. However, in an OTC market buying and selling happens directly between parties. As a result, in a stock exchange, investors, traders, and listed companies have to follow strict regulations to prevent any wrongdoing. Hence, a stock exchange is a relatively safe place for trading in securities. Having learnt what a stock exchange is, let us delve deeper into this topic.
Now that you understand the meaning of a stock exchange, let us take a look at their history:
Belgium had a stock exchange in Antwerp way back in 1531.
In the US, the first stock exchange was the Philadelphia Stock Exchange. However, soon, the New York Stock Exchange (NYSE) took over as the most prominent exchange in the US. The NYSE was established in 1792.
London got its first stock exchange in 1773.
As the US and UK grew as major political powers, the NYSE and London Stock Exchange became prominent worldwide.
Closer home in India, the Bombay Stock Exchange (BSE) was set up in 1875. It is the oldest stock exchange in Asia.
The National Stock Exchange was established in 1992 in India.
The following points explain how stock exchanges work in India:
To start with, companies have to list their stocks on a stock exchange. For this, they need to follow specific rules and regulations set by an exchange.
Once shares are listed, investors can purchase them and become the owners of a company to the extent they hold shares in it.
Then, every day, people place buy and sell orders for shares. Based on the supply and demand, the price of shares is decided on a real-time basis. This process is called price discovery.
The final step involves clearing and settlement. Once a security is traded, a stock exchange has to ensure that it is transferred from the seller to the buyer and money is sent from the buyer to the seller.
The main objectives of a stock exchange are as follows:
A stock exchange helps companies raise capital through shares and bonds. The companies can use the capital thus raised for expansion and growth.
A stock exchange helps in the price discovery of shares, bonds, and any other listed security. As people buy and sell shares through a stock exchange, it helps in finding the price of securities based on their demand and supply.
When companies raise money through a stock exchange, they have to strictly follow rules regarding reporting their financial performance. These standards are set by the regulators. Hence, a stock exchange also ensures corporate governance.
A stock exchange allows retail and institutional investors to invest their money in an efficient manner and earn a sizable return over a period of time. For example, through a stock exchange, retail investors can invest in shares, which can provide them with a much higher return than inflation over a long period.
A stock exchange performs a number of important roles in an economy, which are explained below:
A stock exchange performs the role of a barometer of an economy. By tracking the movements in a stock market, people can assess where an economy is headed.
An exchange ensures high standards of transparency for transactions. On a stock exchange, people trade in securities of listed entities. These entities have to follow strict rules set by the regulators, which ensures a high level of transparency.
A stock exchange plays an extremely crucial role in making people aware of several asset classes, like shares and debentures. If not for a stock exchange, people are left with only a few avenues for investment, like fixed deposits, real estate, gold, etc.
You can buy and sell stocks on a stock exchange by following these steps:
You need to open a demat and a trading account with a stockbroker to buy and sell stocks.
Remember that you cannot call up a stock exchange anymore to trade in securities. Hence, opening an online demat and a trading account is a must.
You also have to link your trading account with a bank account.
You have to log in to your demat account to buy or sell securities. When you log in, you can place buy and sell orders.
To buy a security, you will need to transfer funds from your bank account to your trading account. However, when you sell a security, the funds you receive get transferred from your trading account to your bank account.
A company stands to gain in multiple ways when it lists its securities on a stock exchange:
Listing with a stock exchange allows companies to access capital. Without an exchange, it becomes nearly impossible for companies to raise capital from retail shareholders.
A listed company gets to enjoy a better reputation on average than an unlisted company. This is because listed companies have to make their financials available for public scrutiny once in a quarter. Hence, on average, people trust listed companies more than they trust unlisted ones.
A stock exchange allows companies to raise capital through a diverse set of shareholders, which provides it stability. It is much better to raise capital from diverse shareholders than from a narrow set of shareholders.
Find below the most important benefits of investing through a stock exchange:
A stock exchange allows people to invest in instruments like shares, which can provide them with a much higher return than inflation over a long period.
An exchange is governed by strict rules and regulations. For example, companies have to publicly disclose their financial statements to get their stocks listed on an exchange. This results in transparency, which makes it safer for investors to participate in the stock market.
An exchange allows people to invest in a wide variety of stocks and bonds. There is no other marketplace that allows investors access to such a variety of assets to choose from. Hence, through a stock exchange, investors can optimally diversify their portfolios.
Besides, an exchange provides several liquid stocks and bonds to choose from to invest. Such liquid securities have a high trading volume and hence it is very easy to find a buyer and a seller for them.
While investing in stocks through a stock exchange has multiple benefits, it also exposes you to several risks, which you should be careful about:
You may not get the price you desire when you want to buy or sell a security. Besides, remember that the prices of securities change on a real-time basis on an exchange. So, you have to keep a sharp eye on price movements. Otherwise, you may miss a trading opportunity.
If a stock does not have sufficient liquidity, you may not be able to trade in it. If you want to buy it, you may not find a seller for it. If you are keen to sell it, you may not find a buyer for it.
The prices of stocks on an exchange can be extremely volatile. Besides, the volatility can be due to domestic or international reasons. Investors have to bear the volatility risk inherent in stocks.
A well-functioning stock exchange is extremely important for an economy. It helps all kinds of investors and traders park their funds in securities so that they can earn returns. It allows companies to raise capital to expand and grow. Most importantly, it acts as a barometer for an economy. By observing the movements of stock prices, investors can understand where an economy is going.
Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.
This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.
For All Disclaimers Click Here: https://bit.ly/3Tcsfuc
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A stock exchange is a place where people trade in securities. It helps companies raise capital and enables investors to invest in listed securities. It also helps in the price discovery of securities and acts as a barometer for an economy.
It connects the buyers with the sellers of securities online. You can just log in to your demat account and buy and sell securities.
The major exchanges around the world are the New York Stock Exchange, NASDAQ, London Stock Exchange, Shanghai Stock Exchange, Tokyo Stock Exchange, Hong Kong Stock Exchange, and Bombay Stock Exchange.
In a stock exchange, the transactions are mediated. However, in an over-the-counter (OTC) market, buying and selling directly happens between the parties involved. Besides, participants have to follow strict rules and regulations in a stock exchange, which ensures greater transparency than in an OTC market.
Stock prices are determined based on the demand and supply of shares. If the demand is higher than the supply, the price of a share increases. However, if the supply is higher than the demand, the price of a stock declines.
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