A bank is a place where savers deposit their money and borrowers borrow at a fixed interest rate. Similarly, a stock exchange is a financial marketplace where businesses raise funds and investors invest to generate returns. Almost every financial instrument, including bonds, stocks, Mutual Funds currencies, and other tradeable securities, is traded on the stock exchange.

However, you cannot trade all these securities on a single stock exchange. There are different exchanges to trade different securities. All of them play a vital role in the global financial market. A well-performing stock exchange becomes the backbone of a growing economy and attracts foreign institutional investors to its shores.

If you want to know how to invest online through an Indian Trading App, then it is very important for you to know how the Indian stock market works, types of stock market, role of stock exchange, and functions of the stock market. We have answered all these questions in this stock market blog. Stay connected.

What is a Stock Exchange?

As a beginner, you might have come across a question: What is the stock exchange in India?

The stock exchange is also called the securities exchange or bourse. It is where traders buy and sell securities, including stocks, bonds, currencies, and other financial securities. In the stock market, traders, investors, and institutional investors engage in buying stocks and stock trading, while in the commodity market, they engage in buying and selling commodities.

The role of stock exchanges is to act as an intermediary between buyer and seller, providing the necessary infrastructure and regulation to keep the market running. They are regulated by the Securities and Exchange Board of India (SEBI) and promote transparency, fair pricing, and liquidity.

That being said, to buy stocks on the stock exchange, you need a broker and a demat account, which you can use to trade on the Indian stock market app. If you are just starting out, you can open free demat account online here.

History of Stock Exchange

The history of the stock exchange dates back to 1602. At that time, the Dutch East India Company in Amsterdam started the first and only stock exchange to enable investors to trade their stocks. After that, stock exchanges opened up worldwide, making the financialization of savings possible.

For your reference, the London Stock Exchange started in 1802, India’s oldest stock exchange, the Bombay Stock Exchange, started in 1875, and the New York Stock Exchange started in 1792.

Largest Stock Exchange in the World

Some of the largest stock exchanges in the world as per market cap include:

• New York Stock Exchange

• NASDAQ

• Shanghai Stock Exchange

• Euronext

• Japan Stock Exchange

• Bombay Stock Exchange

• National Stock Exchange

There are 21 stock exchanges worldwide, each with a market cap of over $1 trillion. In 2016, they accounted for over 86% of the global market cap.

What is The Stock Market?

The answer to the question “What is a stock market?” lies in the traded securities. Stock markets are public markets where new shares are issued and existing shares are traded, i.e., bought and sold. They are also called the equity market or share market. Equities or stocks represent ownership stakes in a company, and investors buy and sell such equities in the stock market.

There are different types of stock markets. Some of the popular ones are the commodity market, forex market, derivatives market, and equity market.

How Stock Market Works

The stock market does not work alone. There are many intermediaries in the stock market that ensure that investors can trade in the stock market efficiently on the Indian share market app. You have the broker through whom you can trade through the online app, the depositories where your securities are stored, and the regulators (SEBI) that govern the rules and regulations.

The stock market works primarily on demand and supply. This means, as explained earlier, it is a place where securities are traded between traders. The price of the securities traded depends on the demand and supply mechanisms. If the demand for a stock is more than the supply, the cost of the stock rises, and vice versa.

Difference Between Stock Exchange and Securities Market

The main difference between stock exchange and securities market is that stock exchange is a broader term, and it is a specific place where financial instruments are traded. 

On the other hand, the securities market is a place where financial securities are bought, sold, and even issued. There are two types of securities markets: primary markets, where corporations issue new shares to raise money, and secondary markets, where existing securities are traded between traders and investors.

Functions of Stock Market

• Liquidity: Liquidity means how easily an investor can sell and buy stock. High liquidity means instant buying and selling and vice versa. Since many buyers and sellers trade in the stock market, it enables investors to sell shares instantly, thereby maintaining liquidity.

• Price Discovery: The price of shares is determined by the demand and supply created by buyers and sellers. Investors trade these shares at different prices depending on their perceptions about the company’s financial health, industry, and market trends. This helps in price discovery as the share price instantly incorporates all publicly available information about the company.

• Risk Transfer: Risk transfer means the ability of an investor to transfer risk from one investor to another. The buyer buys stock with the expectation that the price will rise, while the seller sells with the expectation that the price will fall. This way, the seller reduces the risk by selling shares and transfers them to the buyer. Hedging is another method allowing investors to transfer risk to another party.

• Diversification: Diversification allows investors to spread risk by investing across industries, geographic regions, and market capitalizations. By investing their money in different companies operating in different sectors, investors can mitigate the poor performance of one industry, as another industry may perform better.

• Corporate Governance: Publicly listed companies are scrutinized by shareholders and the general public to determine whether they are worth investing in. This improves governance by preventing listed companies from engaging in wrongful activity.

• Economic indicator: The stock market enables the financialization of savings. Its performance reflects a country’s economic strength, as a well-functioning stock market reflects a strong economy and vice versa.

Conclusion

Stock exchange is a very broad term in the securities market. It is a place where a wide range of financial instruments, like bonds, stocks, currencies, etc., are traded. In the stock market, companies’ existing shares are bought and sold by investors who want to get inflation-beating returns. 

SEBI regulates stock exchanges in India. There are different types of stock exchanges, like the Multi Commodity Exchange for commodity trading and the NSE and BSE for stock market trading on the Indian share market app.

The stock market provides liquidity to market participants, helps investors in risk transfer and diversification, and acts as a performance benchmark on the Indian share market app. By listing their shares on stock exchanges, companies improve their corporate governance due to public scrutiny, which helps them with price discovery. It also promotes market efficiency and serves as an economic indicator for a country.

As an investor, understanding the basic terminologies used on Indian share market apps related to the stock exchange, like dividends, equity, average down, volatility, beta, market capitalization, etc., will help you get started.  But before that, don’t forget to Open free Demat account if you don’t have one.