Being an investor you must know the term Share market which is essential for wealth creation. Through the same share market, you must have come across a much-repeated word which is the stock exchange. If you are planning to invest in the share market, then you must know its key role of it and why it is so important.
What are stock exchanges?
The share market is just like another goods market where the shares are traded in the place of goods. Now you must correlate the work of the stock exchange with the normal market where buyers and sellers meet to exchange goods for money. Vendors have the goods with them to sell but don’t have a market or space where to sell while buyers who are in need of those goods also search for vendors but are not aware of the place where they will get those goods. So, the market provides both of them with a designated space in lieu of fees, where both buyer and seller can meet and complete their trade.
Here the market is not participating in the trade activity of buying and selling in any way but just provides the buyers and sellers with a space to meet and complete their trade. In the same way, stock exchanges provide a virtual platform where both buyers and sellers of shares can meet and complete their trade.
Why stock exchanges are important?
As discussed above, the stock exchange facilitates investors and traders in completing their trade virtually. Hence it helps the investors to invest their money into the ownership of companies through the share market.
Every broker needs to be registered with the stock exchanges in order to complete the orders for the investors and you as an investor cannot place a direct order. So, through brokers, you can place your requirements, and your order will be matched and completed by the stock exchange through the brokers. If this system would not have been in place, you would have to go directly to the company to purchase shares or else have to look for the person holding the share of that company.
That means exchanges are making the process of trading quite simple and actually the entire process gets completed within a fraction of a second by exchanges with the help of computers. Stock exchanges not only help investors to build wealth through the process of trading but also help companies to raise funds from the public with the help of the process of Initial Public Offering (IPO).
A company approaches the exchanges for this IPO process to raise funds and an investor can invest in such companies with healthy fundamentals. Stock exchanges generally operate with strict restrictions and ask the companies to comply with the requirements to list in the market. So, if a company is listed in the market that indicates to the investor that the particular company has met all the requirements of the stock exchange.
Where you can invest through stock exchanges:
Through stock exchanges, you can not only trade in shares but also in commodities and metals as well. There are mainly more than 11 sectors in which you can invest your money with the help of stock exchanges. Every sector of the stock exchange is discussed in detail in the other article on sectors to invest in the Indian stock market.
Additionally, you can invest in more than one type of stock through stock exchanges depending on your risk appetite and budget. There are different types of stocks available in the Indian stock market to invest in and are discussed in detail in another article over Types of stocks where you can invest your money.
Types of stock exchanges in India:
The stock market is a fast-growing investment avenue for Indian retailers in recent years. There are mainly two stock exchanges in India, the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). Both these exchanges are situated in Mumbai. Companies get listed in any of or on both of these exchanges post the listing process. A stock exchange is an actual intermediary that connects buyers with sellers
How do stock exchanges work?
Earlier the physical mode of operations was followed by each stock exchange where traders were meeting in person and trading activities were undertaken. But nowadays with the advancement of technology especially in the IT sector, things changed drastically. The process of trading is now online with the help of computers and so the process has also become speedy and efficient. Now trade took a fraction of a second to complete with the technology.
The activities on this platform are regulated by the Securities and Exchange Board of India. The participants have to register with SEBI and the stock exchange in order to conduct trades. A stock exchange is precisely a platform that conducts the trading of financial instruments like stocks and derivatives. Trading activities include brokering, issuing of shares by companies, etc.
Stock exchange undertakes their operation of completing a trade for the investors with the help of brokers and other backend mechanisms. The process of trading or working in the share market gets completed in different steps:
- Investors who are looking to buy any share place a Buy order while at the same time an investor who is looking to book his profit will place a sell order.
- Investors cannot place direct orders on the stock exchange and the order has to be routed through their respective brokers.
- Brokers or firms engaged in this profession acts as a link between the investor and the stock exchange in the completion of the trade order for an investor.
- Once you as an investor place a Buy/Sell order for a particular share for desired quantity to your broker, your broker will forward it to the share exchange concerned where you place the order.
- Once the exchange receives the order, it starts searching for the sell order against your buy order or buy order against your sell order. The exchange will also check for the quantities of shares being placed for buy or sell before matching.
- Share exchange also confirms the identity of both buyers and sellers through its process involved at the back end so as to safeguard the interests of investors.
- If the exchange found a suitable matching order which completes your order, it will confirm the order and communicate the same to the broker for further passing this information to you as you are the investor who placed the order and are in the need of a share.
- The task of matching the order from numerous orders placed in a short span of time is completed by computers and that is the reason your order gets completed within no time.
- Once the details and quantity of shares are matched and the order is executed, the stock exchange will initiate the process of crediting the share to its new owner and this process is called settlement.
- Nowadays, India follows T+2 days of settlement cycle that means, if you purchased a share today then it will get credited to your Demat account the day after tomorrow. This settlement cycle is very important for you to know as the actual credit date is known by this. It plays an important role in some corporate actions like bonuses, splits, and dividends.
- Once the share is settled, the ordered quantity will be reflected in your Demat account and the process of trading gets completed.
You may also like to read:
- Different Sectors of the Indian Stock Market
- 7 Types of Stocks where you can Invest
- Types of Investors in an IPO
- Reasons why people afraid to invest in Stock Market
Although it is not at all necessary for you as an investor to know about the functioning of stock exchanges, because anyhow exchange will perform trading for you. But having the knowledge about the key processes involved with the trade you execute, will instill a sense of faith in you. It will improve your confidence in the stock market when you come to know about the various regulations a company has to follow. By this, the typical market behaviors will not scare you anymore and you can invest confidentially in the share market.