How does a Stock Exchange work? It serves as a marketplace where stocks and other securities are traded, allowing companies to raise funds from investors. The exchange ensures transparency, liquidity, and regulation, enabling investors to buy and sell shares based on supply and demand. Companies list their shares through an Initial Public Offering (IPO), while investors gain ownership in the company and can earn profits from price fluctuations or dividends.
What a stock exchange is
A stock exchange is an organised marketplace where securities like stocks and bonds are listed. Buyers and sellers come together here to trade these listed shares of public companies, playing a significant role in the global economy. Participants in these exchanges include individual investors, institutional investors like mutual funds and pension funds, and also public companies. The primary role of a stock exchange is to provide a fair, transparent, and efficient mechanism for trading securities.
Stock exchange vs stock market
The terms "stock market" and "stock exchange" are often used interchangeably but refer to distinct concepts. How the stock market works is, it includes the broader ecosystem for buying and selling equities, including various venues and mechanisms that facilitate these transactions across the globe. It represents the aggregate of all buyers and sellers, as well as the myriad of securities available for trade. On the other hand, a stock exchange is a specific marketplace within the stock market, where stocks and other securities are traded in a regulated and organised manner.
How does a stock exchange work
The functioning of a stock exchange has the following components:
- Listing of securities: Companies must meet specific requirements to list their shares on a stock exchange. Listing provides companies access to capital from the public in exchange for a share in ownership.
- Trading mechanism: Stock exchanges use different trading mechanisms, such as auction or dealer markets, to facilitate the buying and selling of securities. In India, the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) primarily use an electronic order matching system.
- Price discovery: The process of determining the price of a security through supply and demand dynamics is known as price discovery. This process is facilitated by the trading activity on the stock exchange.
- Clearing and settlement: After a trade is executed, the exchange ensures the transfer of securities and funds between buyers and sellers, a process known as clearing and settlement.
Different exchanges around the world
| Stock exchange | Location | Market cap (As of Dec’23) | Key features |
| New York Stock Exchange (NYSE) | New York City, New York, USA | Approximately $25.6 trillion | Largest by market cap. -Houses major global companies. |
| NASDAQ | New York City, New York, USA | Around $19.5 trillion | Tech and biotech focus. -Electronic trading innovator. |
| Shanghai Stock Exchange (SSE) | Shanghai, China | Estimated at $7.2 trillion | Chinese and international firms. -Key in market liberalisation. |
| Japan Exchange Group (JPX) | Tokyo, Japan | Approximately $6.8 trillion | Largest in Japan and vital for Asia. -Merged Tokyo and Osaka exchanges. |
| Euronext | Multiple Cities | Around $5.6 trillion | Links multiple European economies. |
| London Stock Exchange (LSE) | London, England, UK | About $4.5 trillion | One of the oldest exchanges. -Global company attraction. |
| Hong Kong Stock Exchange (HKEX) | Hong Kong | Close to $4.4 trillion | Gateway for Chinese public companies. -Strong regulation. |
Additional read: Different types of stock trading
Indian stock exchanges
Indian stock exchanges are marketplaces where investors buy and sell shares of publicly listed companies. These exchanges facilitate the mobilisation of capital, promote economic growth, and offer a platform for individuals and institutions to participate in the Indian equity market.
Bombay Stock Exchange (BSE)
Established in 1875, the BSE is Asia's oldest stock exchange and holds a significant place in India's financial history. The BSE lists more than 5300 companies, making it one of the largest and most diverse stock exchanges in the world. The BSE has been a gateway for numerous prominent companies to enter the public financial market, aiding their growth and expansion.
Location: Mumbai, India
Market Cap: Rs. 38,870,992.02 crore (as of March 27, 2024)
Key features:
- The BSE SENSEX, the benchmark index of the BSE, is a barometer for the Indian economy, tracking the performance of 30 of the largest and most financially sound companies listed on the BSE.
- The BSE provides a platform for trading in various financial instruments, including equities, debt instruments, derivatives, and mutual funds.
- It has embraced technological advancements to enhance transparency and efficiency in trading, including the implementation of the BOLT system (BSE On-Line Trading).
National Stock Exchange (NSE)
The NSE, established in 1992, quickly rose to prominence and has been recognized for its advanced electronic trading system, which has been widely adopted across other Indian exchanges. The NSE facilitates extensive trade in a broad spectrum of financial products, including equities, futures and options, and debt securities.
Location: Mumbai, India
Market Cap: USD 4 trillion (Rs 334.72 trillion as of January 16, 2024)
Key features:
- The NSE's flagship index, the NIFTY 50, represents the weighted average of 50 of the Indian stock market's most significant stocks, covering various sectors of the Indian economy.
- The NSE is known for its innovation and has been a leader in India in terms of implementing electronic trading platforms, which have significantly improved market accessibility and efficiency.
- The NSE's reach extends beyond traditional equities and derivatives, offering trading in ETFs, REITs, and a range of financial products, reflecting the breadth of the Indian financial landscape.
These stock exchanges are not just platforms for trading but also serve as indicators of the economic mood of the nation. They facilitate the mobilisation of savings for investment into the productive sectors of the economy, aiding in job creation and economic growth. The Securities and Exchange Board of India (SEBI) regulates the NSE and BSE, ensuring investor protection and market integrity, fostering trust and confidence in the financial system. Through their operations, the BSE and NSE uphold the principles of transparency and accountability, essential for the functioning of vibrant capital markets.
Interesting facts about stock exchanges
- Coffee House Origins: The London Stock Exchange (LSE) originated from Jonathan's Coffee House, where 18th-century traders would gather to buy and sell stocks.
- World War II Impact: The Tokyo Stock Exchange (TSE) closed during World War II but was reopened in 1949, playing a crucial role in Japan's post-war economic recovery. IIn 2013, the TSE merged with the Osaka Securities Exchange to form Japan Exchange Group (JPX), creating a more integrated and efficient financial marketplace.
- Oldest Exchange: The Amsterdam Stock Exchange, established in 1602 by the Dutch East India Company, is considered the world's oldest stock exchange. It set the foundation for modern financial trading and the concept of a company issuing shares to the public.
- Going Green: The Luxembourg Stock Exchange was the first to introduce a platform dedicated entirely to green securities, including green bonds that fund climate and environmental projects.
- Fearless Girl Statue: Positioned opposite the iconic charging bull near the NYSE, the Fearless Girl statue has become a symbol of female empowerment and resilience in the corporate world.
- Opening Rituals: Many stock exchanges have unique opening rituals. For instance, the NYSE starts each trading day with the ringing of a bell, a tradition dating back to the 1870s. The BSE has a similar opening bell ritual. In contrast, the Tokyo Stock Exchange (TSE) features a traditional Japanese clap ceremony to inaugurate trading sessions.
Conclusion
In conclusion, understanding how the stock market works is important for investors, providing insights into the mechanisms that drive the financial space. By understanding the intricate workings of the stock exchange, investors can make informed decisions, manage risk, and potentially reap the rewards of the financial markets.
