Stock Exchange

Stock Exchange

  • Stock exchange or securities exchange is an exchange where stock brokers and traders are provided with the facility to buy and sell the securities such as shares of stock, bonds and other securities.
  • Stock exchanges can also provide facilities for the issue and redemption of such securities, instruments and capital events including facilities for the payment of dividends and income. On the stock exchanges, securities of listed companies derivatives, unit trusts, pooled investment products and bonds etc., are traded.
  • According to the Securities contract regulation act, 1956, any body of individuals constituted for controlling, regulating, or assisting the business of buying, selling or dealing in the securities such as shares and bonds is called a stock exchange.
  • Usually, the stock exchange functions as continuous option markets where buyers and sellers complete the transactions of securities either through electronic trading or at a central location such as the at the floor of the exchange. The securities are required to be listed on the stock exchange for completing the transactions between buyers and sellers.
  • Modern stock markets use electronic trading that provides the advantage of improved speed and reduced cost of transactions.
  • The trading on any stock exchange is restricted to the brokers who are the members of the stock exchange.
  • Various other trading venues such as alternative trading systems, Electronic Communication networks and dark pools are taking away some trading activity from the traditional stock exchanges in recent years.
  • The initial public offerings of shares to the investors takes place through the primary market and the subsequent trading takes place on the secondary market. The supply and demand in the stock exchanges depend upon various factors that affect the price and valuation of stocks.
  • There is no obligation for the issuance and trading of the stocks through stock exchanges and these can take place over the counter.
  • Stock exchanges are part of the global securities market and they provide liquidity to the shareholders for disposing of the shares.

History of the stock exchange

  • There is a lack of consensus over the issue when the first corporate stock was traded. Some scholars point towards key events such as Dutch East India company’s founding in 1602 while other scholars point towards earlier events such as the establishment of Frankfurt stock exchange in 1585.
  • In the early 1600, the Dutch East India Company became the first company that issued bonds and shares to the general public. The company was controlled by its directors and the ordinary shareholders did not have much influence over the management or the accounting statements of the company. However, the shareholders received decent rewards for their investments and the company paid an average dividend of 16% between 1602 to 1650.
  • In England, under Kings William III  the first government bonds were issued in 1963 and the Bank of England was established in the next year. Soon after this, the English joint stock companies started going public. By 1698, John Castaing, broker operating out of Jonathan's coffee house started posting regular lists of stocks and commodity prices. This marked the beginning of the London Stock Exchange.

Role of stock exchanges

Stock exchanges perform a variety of roles for the economy that includes:

 

  • Raising capital for business: stock exchanges provide capital for the expansion of companies by facilitating the selling of shares to the investors. Apart from the option of borrowing from the banks, there are four common forms of capital raising used by firms and entrepreneurs.
  • Going public: capital intensive companies such as IT companies require high volumes of capital in their early stages. To fulfil this purpose, the public market provided by the stock exchanges has become a very important source of funding for many capital intensive startups.
  • Limited partnership: several companies list a significant amount of capital through R&D limited partnerships. To attract the interest of investors in the partnership, the cash on cash return has to be high enough.
  • Venture capital: a common source for the startup companies for using capital has been venture capital. It is a form of private equity, a form of raising capital that is provided by the investors to small early stage startups that are deemed to have high growth potential.
  • Corporate partnership: corporate partnership is the fourth alternative source of raising capital for a private company. Usually, a well established multinational company provides capital to the smaller company in return for marketing rights, patent rights or equity.

 

    • Mobilization of savings for investment: when people invest their savings in shares either through an initial public offering or through the issuance of new shares of an already listed company, it leads to rational allocation of resources being mobilized and redirected for the development of the company and growth of the economy. This promotes business activity which also benefits several other economic sectors such as agriculture, commerce and industry etc.
    • Facilitating the growth of company: companies use acquisition for the expansion of their product lines increasing the distribution channels, hedging against volatility and increasing their market share etc. A take over bid or merger agreement through the stock exchanges provides the most common and simplest ways for any firm to grow by fusion or acquisition.

 

  • Corporate governance: by having a large and varied scope of owners, companies improve the management standards and efficiency for satisfying the demands of their shareholders and the more stringent rules for public companies brought by the public stock exchanges and the government. Therefore, it is believed that public companies usually have more efficient management records than privately held companies. When poor financial and managerial records become known to the stock investors, the stocks and shares of the company tend to lose their value. In the stock exchanges, the shareholders of underperforming companies are penalized by the decline in the share price and they tend as well to dismiss the incompetent management teams.
  • Creation of investment opportunities for small investors: opposed to other businesses which require large capital, investing in shares of companies through stock exchanges is open to both small and large investors. The small investors get the opportunity for owning the shares of the same companies as large investors through the stock exchanges.
  • Capital raising for the government for developmental projects: government needs to borrow money for financing its Infrastructure Projects such as roads, water treatment, housing etc., by selling its securities known as bonds. These bonds can be raised through the stock market where the public investors buy them and loan money to the government. This in short term obviates the need for direct taxation of citizens for financing developmental projects.
  • Barometer of the economy: the prices of shares fall and rise at the stock exchanges That depends upon several economic forces. Prices of shares either remain stable or rise when the companies and the economy show signs of stability and growth. A financial crisis or economic depression can lead to an eventual crash of the stock market. Thus, the movement of share prices and the index of stock markets can be an indicator of the general trend in the economy.

 

Listing requirements

The stock exchanges impose their own listing requirement upon the corporations and firms that aspire to be listed on the stock exchange. This can include the minimum number of shares outstanding, minimum market capitalisation and minimum annual income etc.

  • The Bombay Stock Exchange BSE requires the market capitalisation of Rs 250 million (US$ 3.5 million) and the minimum public float Rs 100 million (US$ 1.4 million).
  • The London stock exchange has the minimum market capitalisation limit of £700,000, the minimum public float of 25%, sufficient working capital for 12 months from the date of listing, and 3 years of audited financial statements.
  • The New York stock exchange has the requirement of issuance of a minimum of 1 million shares of stock worth $100 million, and the company should have earned over $10 million in the last 3 years.

Ownership of stock exchanges

  • Stock exchanges originated as a mutual organisation that is owned by the stock brokers who are also the members of the stock exchange.
  • In recent times, a trend has emerged in which the stock exchanges demutualize, in which the members of the stock exchange sell their shares through an initial public offering. Due to this the stock exchange which was earlier a mutual organisation becomes a corporation.
  • In a demutualized stock exchange, the three functions of ownership, management, and trading are segregated and are in separate hands that removes the issue of conflict of interest.
  • Examples of stock exchanges that have become Corporation are Australian securities exchange (1998), New York stock exchange (2005), NASDAQ (2002) etc.
  • The Shenzhen and Shanghai stock exchanges of China are characterized as quasi-state Institutions as these were established by the government bodies and their leading personnel are appointed by the China Securities Regulatory Commission.

Stock Market Index

  • The stock market index or share market index is a statistical measure that shows the changes in the prices of shares taking place in the stock exchange. The stock market index is calculated from the prices of selected stocks which is usually the weighted average of those stocks.
  • It is used by the financial managers and investors for describing the market and for comparing the return on specific investments. The criteria for selecting the stocks can be market capitalisation, type of industry etc.
  • The value of the stock market index is calculated on the basis market index which is calculated on the basis of the underlying stocks. If any change takes place on the value of underlying stocks, it impacts the overall value of the stock market index.
  • Some important stock market indices used in India include NSE Nifty and BSE Sensex.
  • BSE Sensex is a market capitalisation weighted stock market index of 30 Companies listed on the Bombay Stock Exchange. The base value of BSE Sensex is taken as 100 on 1st April 1979 with base year as 1978-79.

Major Stock Exchanges of the World

There are about 16 stock exchanges with the market capitalisation of over US Dollar 1 trillion. These stock exchanges are often referred to as “$1 Trillion Club” and these stock exchanges account for around 87% of the market capitalisation of the world. The major stock exchanges in the world are:

 

  • New York stock exchange: it was founded in 1817 and is located on wall street in New York. It is the largest stock exchange of the world by market capitalisation. The market capitalisation of the companies listed in the New York stock exchange was around US$ 23.12 trillion in March 2018.
  • NASDAQ: it is the second largest stock exchange of the world founded in 1971 and located in New York. The market capitalisation was around US$ 10.93 trillion in March 2018.
  • Tokyo stock exchange: it is the third largest stock exchange of the world and the largest stock exchange in Asia. Tokyo stock exchange was established in 1878 with the market capitalisation of US $6.22 trillion as of March 2018.
  • Shanghai Stock Exchange: it is the fourth largest stock exchange of the world founded on November 26, 1990. It is one of the two stock exchanges operating in China the other being Shenzhen stock exchange. The market capitalisation of the Shanghai Stock Exchange was USD 5.5 trillion as of April 2018.
  • Hong Kong Stock Exchange: it was founded in 1891 by the Association of Stockbrokers and its market capitalisation reached USD 4.46 trillion 10 March 2018. The physical trading floor of this stock exchange was closed in 2017 and provisions were made for electronic trading.
  • London stock exchange: it was founded in 1801 and has now become the sixth largest stock exchange in the world. The market capitalisation of the London stock exchange was USD 4.38 trillion in March 2018. The headquarters of the stock exchange is located in London, United Kingdom.
  • Euronext Stock Exchange: it was founded in 2000 and it is based in Amsterdam, Netherlands. It has Pan European exchange with operations in Netherland, France, Portugal, Belgium, Ireland and the United Kingdom. It is the seventh largest stock exchange of the world with the market capitalisation of USD 4.36 trillion.
  • Shenzhen Stock Exchange: it is one of the two stock exchanges of China based in the city of Shenzhen, China. It was founded in 1987 and became operational in 1990. The market capitalisation of this Stock Exchange was USD 3.49 trillion in March 2018. It is the 8th largest stock exchange in the world.
  • Toronto Stock Exchange: it is the largest stock exchange in China which was founded in 1852. It is the third largest stock exchange of North America and 9th largest stock exchange of the world. The market capitalisation of The Toronto stock exchange was USD 2.29 trillion in March 2018.
  • Frankfurt Stock Exchange: it was founded in 1585 for fixing the currency rates but later became a full fledged stock exchange. The market capitalisation of this stock exchange was USD 2.22 to trillion in March 2018.
  • Bombay Stock Exchange (BSE): it was founded in 1875 and it is the first stock exchange of Asia. It is the 10th largest stock exchange of the world with the overall market capitalisation of USD 2.3 trillion in April 2018. The headquarters of this stock exchange is located at Mumbai, Maharashtra, India.
  • National Stock Exchange of India (NSE): it is the leading Stock Exchange of India, located in Mumbai, Maharashtra, India. It was established in 1992 and it's market capitalisation reached USD 2.27 trillion in April 2018.

 

Stock exchanges of India

National Stock Exchange of India Limited (NSE)

  • According to the World Federation of Exchanges (WFE) report, it is the leading stock exchange in India and the second largest stock exchange in the world by the number of trades in equity shares from January to June 2018.
  • Electronic screen based trading was launched at NSE in 1994, derivatives trading and internet trading started in 2000 which were first of its kind in India.
  • National Stock Exchange has a fully integrated business model that includes exchange listings, trading services, indices, market data feeds, clearing and settlement services, financial education offerings etc.
  • It inspects the compliance by trading and clearing members and listed companies with the rules and regulations of this Stock Exchange.

Purpose, Vision and Values of NSE

 

  • Purpose: “Committed to improve the financial well-being of people.”
  • Vision: “To continue to be a leader, establish global presence, facilitate the financial well-being of people.”
  • Values: “NSE is committed to the following core values:

 

    • Integrity
    • Customer focused culture
    • Trust, respect and care for the individual
    • Passion for Excellence
    • Teamwork”

Bombay Stock Exchange

  • It is Asia's first and first and the fastest stock exchange in the world with the speed of 6 microseconds. It was established as ‘The Native Share and Stock Brokers Association’ in 1875. In 2017, it became the first listed Stock Exchange of India.
  • BSE provides the market for trading in equity, currencies, derivatives, mutual funds, and debt instruments.
  • BSE SME is India's largest SME platform with more than 250 listed companies.
  • BSE STAR MF is the largest online mutual fund platform that processes more than 27 lacs transactions per month.
  • BSE has launched India INX, India's first international exchange located at the GIFT CITY IFSC in Ahmedabad, Gujarat.
  • The Corporate Social Responsibility of BSE focuses on education, health and environment. It has been supporting the rehabilitation and restoration efforts in the earthquake hit communities of Gujarat. It has been awarded the Golden Peacock Global CSR award for its initiatives and corporate social responsibility.

Vision of BSE: "Emerge as the premier Indian stock exchange with a best-in-class global practice in technology, products innovation and customer service."

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