What Is A Stock Exchange?
Stock exchange is a key institution of the secondary capital market. Stock exchange facilitates the purchase and sale of various kinds of securities. It is an organized market place for buying and selling various types of securities by the investors thus providing liquidity to the securities. Stock exchange allows buying and selling of already issued securities. The companies and government issue securities to the public in the primary capital market and then these securities are listed on the stock exchanges for trading among investors. So stock exchange is also called as secondary capital market. All the transactions in securities at the stock exchange are done only through the registered members of stock exchange called as brokers. Investors cannot directly trade securities in stock exchange. They can do so only through the brokers who transact on behalf of them at the stock exchange.
Major Stock Exchanges Around The World:-
Following are some of the biggest and well-known stock exchanges in the world:-
New York stock exchange (NYSE):-
New York stock exchange is located in the New York city in United States of America. NYSE is the world’s largest stock exchange by market capitalization. NYSE relied on floor trading for many years but now more than half of the trades on NYSE are done electronically. For more information about NYSE you can visit the site www.nyse.com
NASDAQ stock exchange:-
NASDAQ originally stood for National Association of Securities Dealers Automated Quotations. NASDAQ is an American stock exchange and the second largest stock exchange in the world by market capitalization and is world’s first and largest electronic stock exchange. All the trades on NASDAQ are done electronically and floor trading does not exist. NASDAQ was founded in 1971. For more information about NASDAQ you can visit the site www.nasdaq.com
Tokyo stock exchange:-
Tokyo stock exchange is located in the Tokyo city in Japan. It is the largest stock exchange in Asia by market capitalization and third largest in the world. For more information about Tokyo stock exchange you can visit the site www.tse.or.jp/english/
London stock exchange:-
London stock exchange is located in the London city in United Kingdom. It was founded in 1801. For more information about London stock exchange you can visit the site www.londonstockexchange.com
Stock Exchanges In India:-
National Level Stock Exchanges:-
There are two major national level stock exchanges in India:-
(1) National Stock Exchange of India Ltd (NSE):-
National Stock Exchange of India Ltd was incorporated in 1992. Its head office is in Mumbai. NSE was established to provide a modern, fully automated screen-based trading system with national reach. NSE provides a fully automated screen based trading system for trading of securities. The trading system is known as National Exchange for Automated Trading (NEAT) system which is a order driven system. NSE does not have trading floor and all the trades take place electronically through the trading terminals. For more information about NSE you can visit the site www.nseindia.com
(2) Bombay Stock Exchange Ltd (BSE):-
Bombay Stock Exchange was established in 1875. Its head office is in Mumbai. BSE is the oldest stock exchange in Asia and the first stock exchange in India to get permanent recognition from the Government of India. More than five thousand companies are listed on BSE making it the world’s number one exchange in terms of listed companies. Earlier BSE used to have floor trading system but in 1995, BSE switched to automated screen based trading system called as BSE online Trading (BOLT) system which is an order driven system. So all the trades on BSE now take place electronically through the trading terminals. For more information about BSE you can visit the site www.bseindia.com
Regional Stock Exchanges:-
Regional stock exchanges were setup regionally to enable regional companies in the respective geographical regions to raise capital and to spread the equity cult among the investors all over the country. The first regional stock exchange in India to operate was Ahmadabad Stock Exchange which was followed by Calcutta Stock Exchange. Because of the introduction of automated trading and the extension of nationwide reach of NSE and BSE with their terminals all over the country, the relevance of regional stock exchanges in lost today. There is very limited amount of trading done on the regional stock exchanges and some of the regional stock exchanges have been closed down and some are in the process of closing down. Currently the following regional stock exchanges are still functioning in India:-
– Ahmadabad Stock Exchange
– Calcutta Stock Exchange
– Bangalore Stock Exchange
– Delhi Stock Exchange
– Madhya Pradesh Stock Exchange
– Madras Stock Exchange
– Bhubaneswar Stock Exchange
– Cochin Stock Exchange
– Guwahati Stock Exchange
– Jaipur Stock Exchange
– Ludhiana Stock Exchange
– Magadh Stock Exchange
– Vadodara Stock Exchange
– UP Stock Exchange
– Pune Stock Exchange
OTC Exchange Of India (OTCEI):-
Over-the-counter Exchange of India was incorporated in 1990 as a company under the companies act and also got recognized as a stock exchange. It is based in Mumbai. OTCEI is the first screen based nationwide stock exchange in India and the first stock exchange to introduce market making in India. The screen based trading system of OTCEI is called as OTCEI Automated Securities Integrated System (OASIS) which is a combination of order driven and quote driven system. OTCEI is a floor less exchange. Companies that are listed on OTCEI are small companies who are looking to gain access to the capital market but cannot meet the listing requirements of large stock exchanges. For more information about OTCEI you can visit the site www.otcei.net
What Is An Index?
Index, also called as indice, is a statistical indicator that reports the changes in the market value of a group of stocks. It gives a general idea about whether the prices of most of the stocks have gone up or gone down. Index can be broad-based index or sector specific index. The main index of a stock exchange is broad-based index and is comprised of major companies stocks listed on that stock exchange and reflects the price movement or performance of the entire stock market. Whereas sector specific index is comprised of stocks of companies which belong to the same specific sector and reflects the price movement or performance of that particular sector only.
Major Stock Indexes In The world:-
Following are some of the closely watched indexes in the world:-
Dow Jones Industrial Average:-
Dow Jones Industrial Average is the index of New York Stock Exchange but it also comprises of stocks of companies that are listed on NASDAQ. Dow Jones Industrial Average comprises of 30 large companies stock based in America.
NASDAQ composite comprises of more than 3000 companies stock listed on NASDAQ stock exchange. Since both American as well as non-American companies are listed on NASDAQ, the index comprises of both American and non-American companies stocks.
Standard and Poor’s 500:-
Standard and poor’s 500 comprises of stocks of companies that are listed on New York Stock Exchange as well as those that are listed on NASDAQ Stock Exchange. S&P 500 comprises of 500 leading companies stock based in America.
Nikkei 225 comprises of 225 top rated Japanese companies stock listed on the Tokyo Stock Exchange.
FTSE 100 comprises of 100 largest companies stock listed on the London Stock Exchange.
Stock Indexes In India:-
There are two major indexes in India which are closely followed:-
CNX Nifty is an index of all the major companies stock listed on the National Stock Exchange of India Ltd. Nifty comprises of 50 companies stock representing twenty-three sectors of the economy. These 50 stocks are reviewed and modified from time to time according to the position of respective companies. Nifty is owned and managed by India Index Services and Products Ltd (IISL). Nifty is computed using the free float market capitalization weighted method.
S&P BSE sensex is an index of all the major companies stock listed on Bombay Stock Exchange Ltd. Sensex comprises of 30 companies stock representing key sectors of the economy. These 30 stocks are reviewed and modified from time to time according to the position of respective companies. Sensex is computed using the free float market capitalization weighted method.
In addition to the above major broad-based indexes, there are many other indexes in India which are closely watched such as CNX mid cap and CNX small cap which comprises of medium and small companies stocks listed on NSE respectively, S&P BSE mid cap and small cap which comprises of medium and small companies stocks listed on BSE respectively. Sectoral indexes such as CNX auto, CNX IT, CNX metal, etc which comprises of stocks of companies of respective sectors listed on NSE, sectoral indexes of BSE such as S&P BSE Bankex, S&P BSE capital goods, S&P BSE oil and gas, etc which comprises of stock of companies of respective sectors listed on BSE.
What Is Listing Of Securities?
Listing of securities means admission of securities of a public company on the stock exchange for trading. The company wanting to get its securities listed on a stock exchange is required to enter into a listing agreement with that stock exchange. The listing agreement contains the terms and conditions of listing and the disclosures that shall be made by the company on a continuous basis to the stock exchange. Because of listing, the liquidity of the securities is ensured making it easy to buy and sell the companies securities on the stock exchange. The listing agreement signed by a company with the stock exchange provides for timely disclosure of information to investors by the company thus enabling them to take important decisions regarding their investment in the company. Listing also improves the public image of a company.
What Is Delisting Of Securities?
Delisting of securities means permanent removal of securities of a listed company from the stock exchange. Because of delisting, the securities of the company would no longer be traded on that stock exchange from which the securities are delisted. Delisting of securities can be of two types- compulsory delisting, which refers to the permanent removal of securities of a listed company by the stock exchange as a penalty for not complying with the various requirements of the listing agreement and voluntary delisting, where a company decides on its own to permanently remove its securities from the stock exchange.
Settlement Of Trades:-
Settlement of trade is the process in which payment is made by the investors who have purchased the securities and securities are delivered by the investors who have sold the securities. The process of settlement of trades is managed by the stock exchange through the clearing house who ensures that the settlement takes place smoothly.
The period within which the settlement of trades is done is called as the settlement cycle. It is the period within which the buyers of securities receive the securities and sellers of securities receive the money.
In India, all the trades done on BSE and NSE are settled by the method of Rolling settlement. Under Rolling settlement, all the trades done on a particular day are settled after a given number of business days. Trades in rolling settlement are currently settled on a T+2 basis i.e trade day + 2nd working day after the trade day. For e.g a trade executed on Monday (T day) would be compulsorily settled by Wednesday (2nd working day), a trade executed on Tuesday (T day) would be compulsorily settled by Thursday (2nd working day) and so on. All the intervening holidays such as bank holidays, stock exchange holidays, Saturdays and Sundays are excluded for arriving at the settlement day. All the trades in equity shares and fixed income securities listed on BSE and NSE are settled on T+2 basis.
The pay-in and pay-out of funds and securities takes place on the 2nd working day after the trade day. Pay-in is the process in which securities sold are delivered to the stock exchange by the sellers (securities pay-in) and the funds for the securities purchased are made available to the stock exchange by the buyers (funds pay-in). Pay-out is the process in which the securities purchased are delivered to the buyers (securities pay-out) and the funds for securities sold are given to the sellers (funds pay-out) by the stock exchange.
What Is Demutualization Of Stock Exchanges?
Demutualization of stock exchange means converting a traditional ‘not for profit’ stock exchange into a ‘for profit company’ which changes the legal structure of that stock exchange from a mutual form to a business corporation form. In a demutualized stock exchange the ownership, management and trading rights are in separate hands. Through demutualization a stock exchange becomes a corporate entity and transforms from a non-profit organization to a profit-making company like other corporate entities.
Historically stock exchanges were formed as mutual organization by trading members i.e brokers for their common benefit. These stock exchanges owned by trading members tend to work towards the interest of the members alone which could be detrimental to the rights of investors and others. Due to separation of ownership and trading rights in the demutualized stock exchanges, there is no conflict of interest between the members and stock exchange and there is greater management accountability. Also demutualized stock exchanges are more professionally managed than the mutual stock exchanges.
In India, both the national level stock exchanges i.e BSE and NSE are demutualized. NSE was established as a demutualized stock exchange while BSE became demutualized in 2007.