A stock exchange works like a marketplace for those who want to trade or invest in the stock market. Companies that want to raise funds by issuing shares to the public get listed in the stock exchange. You can purchase these shares hoping that their value appreciates over time. In India, NSE (National Stock Exchange) and BSE (Bombay Stock Exchange) is the major stock exchanges where most of the trading takes place.
The basic role of a stock exchange is to provide a medium where investors can buy or sell securities without any issues. The securities that are traded in the stock exchange are stored in depositories like CDSL (Central Depository Securities Limited) and NSDL (National Securities Depository Limited).
The depositories work like a bank but instead of money, they store your shares in electronic format. You cannot communicate with the depositories directly if you are interested in buying a share. Instead, you need agents or brokers who can communicate with the depository on your behalf. To manage this communication seamlessly, the concept of demat account was introduced in the Indian stock market.
A demat account is an account that stores your shares in electronic format. To maintain the safety of your holdings and provide other services like share transfers, dematerialisation, etc. certain demat account charges are associated with it. Most brokers provide the demat account opening online process that allows you to open a demat account from your home.
Features or characteristics of a stock exchange
To understand the working of a stock exchange in detail, you need to understand its features or characteristics. Here are some of the key features or characteristics of a stock exchange:
Stock exchange is an organized market
A stock exchange is an organized market of securities because every transaction is governed or regulated by rules. It provides you with an organized way of investing in shares, bonds, debentures, and other securities.
Its formation & membership
Insurance companies, banks, and financial institutions come together to form a stock exchange. However, the formation is considered to be valid only if it is approved by SEBI. Corporates, banks, partnerships, and individuals can apply for membership in the stock exchange. However, the membership is only provided to those who fulfill the eligibility criteria prescribed by the stock exchanges and SEBI.
Registration of securities
You can invest or trade in particular security only if it is registered on a stock exchange. Companies who want to list their securities in the stock market need to be first verified by the stock exchange as genuine companies.
Regulatory body
The stock exchanges work according to predefined guidelines or policies set by a regulatory body. SEBI (Securities Exchange Board of India) works as a regulatory body for the stock exchanges in India.
Functions of the stock exchange
Now that you know how a stock exchange is formed, let’s get to know about its functions in detail:
Marketability of securities
A stock exchange works like a medium where securities can be purchased or sold freely. It allows companies to raise funds by listing their shares whereas investors get a portion of a company’s profit through appreciation in share value or through corporate benefits like bonus issues, dividends, etc.
Determination of stock prices & continuity
The share price is evaluated as per a stock’s demand and supply in the market. The shares which are in high demand tend to increase whereas shares that have no buyers depreciate in value. The stock market moderates the stock price and provides continuous buying and selling opportunities to investors.
Mobilising surplus savings
Stock exchange mobilises the savings of investors by allowing them to invest in the upcoming IPOs or shares of a listed company. The mobilisation of funds helps companies to raise funds to diversify and expand their business. This aids the rapid development of industries and strengthens the economy.
Liquidity
The stock market allows you to liquidate your investments any time you want to. The easy liquidity provided by the stock exchange encourages investors to invest their capital in the share market.
Speculation of stocks
The stock exchange allows speculators to speculate on the prices of stocks within certain restrictions. This speculation ensures that the prices of the stocks don’t fluctuate significantly.
See also: How Indian Investors Can Directly Trade In 8 Major Us Stocks
