Stock Exchanges

Stock Exchanges

This article deals with ‘Stock Exchanges.’ This is part of our series on ‘Economics’ which is an important pillar of the GS-3 syllabus. For more articles, you can click here.


Introduction

Shares are issued through IPO in the Primary market. Then, they can be resold at the secondary market, commonly known as the Share market or Stock Exchange.

Stock Exchanges

Facts

  • Worlds first stock market was opened in Amsterdam Stock Exchange in 1631, followed by London Stock Exchange in 1773.
  • Bombay Stock Exchange was the first to be opened in India (and Asia) in 1875, followed by Ahmedabad and Kolkata.
  • States have their own Stock Exchanges as well. E.g., Punjab’s Stock Exchange is in Ludhiana.
  • The world’s five largest stock exchanges are (1) New York Stock Exchange, (2) NASDAQ, (3) Tokyo Stock Exchange, (4) London Stock Exchange and (5) the Bombay Stock Exchange. 
  • In 2018, the Bombay Stock Exchange(BSE) became the first Indian exchange to be designated as a ‘Designated Offshore Securities Market’ (DOSM) by the US Securities and Exchange Commission (SEC). DOSM status allows the sale of securities to US investors through the trading venue of BSE without registration of such securities with the US SEC, which eases the trades by US investors in India. Other Stock Exchanges with DOSM Status are London Stock Exchange, Bourse de Luxembourg, Tokyo Stock Exchange and Toronto Stock Exchange. 

Players in Stock Exchanges

1. Broker

  • A broker is a registered stock exchange member who buys or sells shares/securities on his client’s behalf and charges a commission.

2 . Jobber

  • A jobber is a broker’s broker or one who specialises in specific securities catering to the need of other brokers.

3 . Market-Maker

  • Market Maker is an intermediary in the market ready to buy and sell securities and quotes two-way rates.

Stock Exchanges in India

There are 27 Stock Exchanges in India – 7 at the national level and 20 at the regional level.

Bombay Stock Exchange (BSE)

  • Earlier, BSE was a regional stock exchange and converted to a national exchange in 2002.
  • It is the biggest stock exchange in India, accounting for 75% of total stocks traded in India and the fifth largest in the world based on market capitalisation.
  • BSE’s flagship index is Sensex.


Side Topic: Specific problems of share market before 1992

1. Monopoly of Bombay Stock Exchange (BSE)

  • There were almost 20 regional stock markets in 1992, but BSE enjoyed a monopoly.
  • Users from outside Bombay found it extremely difficult to trade in BSE due to poor technology & the high cost of telecommunication.
  • BSE imposed a high entry barrier, so competition among brokers was absent. Services provided by brokers were highly inefficient & costly.

2. Open outcry system

  • Trading used to take place in the trading ring where non-brokers were not allowed in & these traders used to shout prices.
  • There wasn’t any mechanism to verify the prices at which trading actually took place.

3. Badla System

  • Under Badla System, settlement of share used to happen on T+72 days basis. It means that if the investor has bought shares today, he got real possession of shares after 72 days.
  • Presently, T+2 System is in place, i.e. settlement has to happen in 2 days. In September 2021, SEBI allowed the Stock Markets to start T+1 System.

The Lower Settlement period has many benefits to the system

  • It reduced the capital to collateralise the risk of unsettled deals.
  • It helped in reducing the systemic risks.

4. Bad Delivery of Shares

  • Once you buy a share, you have to send these shares to the registrar of the company to register ownership of the share in your name. 
  • But the problem of bad delivery of share can happen. For example, if the signature of the seller didn’t match with one maintained with the registrar, the share would be sent back.

To tackle all these problems

  1. The government made law to give power to SEBI to control primary & secondary markets. 
  2. And to end the monopoly of BSE, a new national-level stock exchange NSE was opened.
  3. BADLA System (T+72) system was changed to T+2, i.e. settlement has to be completed in 2 days.

NSE (National Stock Exchange)

  • NSE is located in Mumbai. It was established in 1992 & started trading in 1993.
  • Promoted & managed by public sector financial institutions – IDBI, UTI, LIC, GIC, SBI& IDFC & foreign investors like Citigroup. 
  • It is professionally managed (as opposed to brokers).
  • NSE’s flagship index is S&P’s CRISIL NIFTY-50.
  • From 2022, Indian investors will be able to trade in the stocks of 50 leading US companies through the NSE International Exchange, a subsidiary of NSE

4 Innovations of NSE which changed all stock exchanges in India

1. Computerised Trading

  • Trading was done in front of investors leading to Transparency.

2. Satellite Communication

  • To spread the reach of exchange to all over the country.

3. Professional Managers

  • Traditional stock exchanges were managed by Brokers leading to a rise in malpractices. Since Brokers themselves were in-charge of enforcement, they never took decisions against themselves.
  • In NSE, enforcement was entrusted to professional managers.

4. Weekly settlements

  • T+72 system was replaced with weekly settlements.

Result –  NSE busted BSE

  • Equity trading at NSE commenced in 1993.
  • Within one year, NSE surpassed BSE in terms of turnover.

Good things happened due to NSE

  • Cartelisation of brokers ended
  • Led to higher Transparency
  • More brokers lead to competition & less commission
  • No more bad delivery of shares (due to Demat account)
  • Investors from outside Mumbai were also able to invest.

Later, BSE also introduced similar changes to remain in the market.


Regional Exchanges

There is a total of 20 regional stock exchanges in India.

Ludhiana (established in 1983) Jaipur Ahmedabad (1894 – first Regional Exchange) Indore Pune
New Delhi Meerut Rajkot Vadodara Hyderabad
Mangalore Bangalore Ernakulam Coimbatore Madras
Patna Kanpur Bhubaneshwar Kolkata Guwahati

SENSEX

  • Sensex = Sensitive Index (Full Name – S&P BSE SENSEX)
  • It is a popular Equity Index of the Bombay Stock Exchange (BSE).
  • It was started in 1986.

Concept of Free Float Market Capitalisation

  • To understand how SENSEX is calculated, we must know Free Float Market Capitalisation.
  • Free Float Market Capitalisation = Total Price of all the shares in the market on that day (excluding with company) 
  • Suppose in 1979; Company launched IPO with 1 lakh shares. 30,000 shares were bought by the Promoter (owner), and the public bought 70,000 shares. Assume Price of each share in 1979 was ₹10. Hence, the Free Float Market Capitalisation of the Company in 1979 was ₹ 7 lakh (10 X 70,000).
  • Later, if the Price of Shares increases, Free Float Market Capitalisation will change as well (as explained in the infographic below)
SENSEX Calculation
Stock Exchanges

How SENSEX is calculated??

How SENSEX is calculated
  • Base Year – 1978-79
  • Measured using the weighted average of the 30 largest companies traded in BSE & these companies keep on changing based on market capitalisation.

When does Share Market go up or down?

When Share Market/SENSEX Go Down 1. War
2. Inflation
3. Political Instability
When Share Market/SENSEX Go up 1. Soft monetary Policy
2. Relaxing FDI norms
3. Merger & Acquisition Rumours

Other such indexes

SENSEX BSE + (S&P)  => 30 Companies
NIFTY NSE (+ CRISIL) => 50 Companies
Nikkei Tokyo Stock Exchange (225 Companies)
Dow Jones USA

Securities & Exchange Board of India (SEBI)

  • SEBI is the regulator of the Indian stock market.
  • It is headquartered in Mumbai. 
  • The Board of SEBI comprises nine members, excluding the chairman.

Functions

  • Regulator of Securities (Shares, Bonds, Debentures etc.).
  • Regulatory oversight over places (Stock Exchanges, Depositories etc.) and Persons (Brokers, MF Managers, Inside Trader) 
  • Regulates any Collective Investment Scheme of or more than ₹100 crores.
  • Promote financial literacy of investors. 

Journey till now

1988 SEBI was formed via Executive Order.
1992 SEBI became a Statutory Body.
2014 SEBI Act amended to give powers to search, seize, and arrest to SEBI and all Collective Investment Schemes of more than ₹ 100 crores was placed under the regulation of SEBI. 
2015 Forward Market Commission scrapped and Commodity markets were placed under the regulation of SEBI.

Commodity Exchanges

  • Commodity trading happens similar to ‘stock trading’ in the stock market. But in contrast to stocks, commodities are actual physical goods such as wheat, oil, gold etc.
  • Futures are contracts for commodities that are traded on exchanges. Commodity futures serve a great purpose by hedging participants against price fluctuations. Take the example of agriculture. 
    1. A corn farmer can sell ‘corn futures’ on a commodity exchange. It will lock the sale price of a specified quantity of wheat at a future date, protecting the farmer from price fluctuations.
    2. Corn mill can purchase the corn futures from the exchange and fix its future purchase cost for a specified quantity of corn. 
  • There are 21 commodity exchanges in India, including three ‘national level’ exchanges, i.e. Multi-commodity Exchange of India Ltd. (MCX), Mumbai; National Commodity and Derivatives Exchange Ltd. (NCDEX), Mumbai and National Multi-commodity Exchange of India Ltd. (NMCE), Ahmedabad.
  • SEBI regulates Commodity Exchanges. Earlier, Forward Market Commission (FMC) was the regulator of Commodity Exchanges, but the Government of India merged the FMC with the SEBI in September 2015.

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