What is Stock Exchange and How NSE & BSE Works?

Stock, shares, NSE, BSE might seem to pass over the head. You might argue that it is not a thing that you may digest easily. Probably, that is why you decide to turn to the next page of the newspaper once you come across the finance portion. Trust me, understanding stock can be a piece of cake. It is quite interesting and who knows, after reading this article you might think about applying the knowledge into practice. In order words, you might be hooked into stocks, shares, the NSE and BSE and might even start your journey as an investor provided you have the right funds. 

So, what is it that you are going to learn today from this article? 

In this article, before moving to the BSE and NSE difference, or “How NSE and BSE works” we will talk about the basics “what is a stock?”, “what is a stock exchange?”, “Benefits of listing with a stock exchange” “what is NSE”, “what is BSE” and conclude with “list of stock exchanges in India” and a final thought.

So, let us start our reading journey without delaying a tiny bit of our time!  

What is a Stock?  

• A stock is a security that indicates that the investor owns a fraction of the corporation’s assets. Any profit within the corporation would result in the profit of the investor. A stock is also referred to as an equity. 

• A share is an unit of a stock. In other words, a stock can be referred as the collection of all shares. A share can be defined as the assets that the investor owns in the company. There are certain exceptions regarding which part of the assets the investor actually owns. For example, the property including chairs and tables of a corporation doesn’t belong to a shareholder. On the other hand, if the investor goes bankrupt, the company remains unaffected. 

• When a corporation or a company plans to expand their business or raise funds, they might either take a loan or issue stocks in the stock market. As history is evidence, investing in stocks has proved to be the best option over the long run. 

What is a Stock Exchange?  

• The stock exchange is a market space where traders sell and purchase securities. On one hand, the traders mean the companies and on the other, they mean investors or the public. While companies sell stock, bonds and commodities, investors make purchases. 

• The stock exchange in India needs to conform to rules and regulations set by the Securities and Exchange Board of India (SEBI). The SEBI is a statutory body that protects the interests of the investors in stock trading and safeguards them against fraudulent practices. The regulatory body also plays a vital role in the promotion of the stock market in India. 

• There is an appointed schedule within which the trading in stock exchange takes place. It is conducted keeping the SEBI’s guidelines in consideration. Companies that are listed in a stock exchange can only perform trading but there are certain exceptions as well. Companies that are not listed can still conduct trading in an “Over the Counter Market”. However, getting listed in a stock exchange has many benefits and is even considered reputable. 

Benefits of listing with a stock exchange  

There are many benefits attached to listing with a stock exchange. Some of these privileges are presented below:  

• Investors trust stocks listed by reputable stock exchanges. The only way to accelerate the market reputation is to have more number of shareholders. Companies can bring more shareholders by issuing shares in the market. 

• One of the best ways to avail cheap capital is by investing in stock markets. Listed companies generate more capital because of their reputation in the stock exchange which keeps their companies running. 

• Companies will get a quick credit approval if they are listed in the stock exchange. This is because such companies are more credible. 

• Listing enables a shareholder to avail the facilities of liquidity in a far efficient way as compared to its counterparts. The shareholders can easily calculate the value of investment that they own. 

• The prices of the listed securities are dependent on the demand and supply and are revealed publicly so that investors can make a fair decision to acquire them. 

What is NSE?  

• NSE stands for National Stock Exchange. It holds the top position as a stock exchange platform in India and was established in 1992. NSE is the fourth largest stock exchange in the world and its office is situated in Mumbai. It is also the first stock exchange in the country to provide a screen-based system that matches the buyer with the seller in order-driven system and proceeds with the transaction process. 

• NSE was an outcome of a group of financial institutions that aimed at transparency in the Indian market system which it has duly achieved. With the Indian government’s aid, the NSE offers services such as trading, clearing and settling debts, equities involving Indian and foreign investors. Since the NSE operates in a dematerialized manner, the procedure of buying, selling and holding shares is both cost-effective and foolproof. Moreover, the NSE has also resulted in more financial contracts taking place between companies and investors. 

What is BSE?  

• BSE stands for Bombay Stock Exchange. It is Asia’s oldest stock exchange and the fastest one in the world with a trading speed of 6 microseconds. It is also one of the top 10 stock exchanges in the world regarding market capitalisation. The Bombay Stock Exchange in India lists nearly 6000 companies and has played a vital role in substantially improving the capital market space. 

• It was initially named Native Share and Stock Brokers Association by its founder Premchand Roychand in 1875. The Bombay Stock Exchange rose from humble origins as it functioned under a Banyan tree at Dalal Street. Traders would gather at the place and carry out purchasing or selling of stocks. Gradually the network expanded until it was named the Bombay Stock Exchange. 

How do NSE and BSE Work?  

• The two types of indices that represent NSE and BSE are Nifty and Sensex. These indices usually determine the health of the stocks in the NSE and BSE thus serving as an indicator of the India’s economy as well. 

• Depending on certain parameters such as the company’s reputation, market capitalisation, significance, a set of 50 stocks are selected in the NSE and 30 in the BSE. These stocks form a part of a weighted formula that gives out the value of the indices. 

• The stock prices are directly proportional to the value of Nifty and Sensex. This means if the stock prices scale, there will be an increase in the value of the indices. On the other hand, if the stock price go down, the value of the indices would follow suit. 

• A company gets registered in the stock exchange or goes public through an IPO (Initial Public Offering) first in order to raise money from investors.  

• Investors create a demat account or dematerialized account to carry out the trading processes. Depending on the rise in stock price on Nifty or Sensex, investors carry out purchasing or selling decisions. 

• Companies can sell the shares at a certain price to the investors or the shareholders. Apart from the shares, the investors also receive dividends or bonuses (another word for profit) depending on the company’s growth. The regulating authority that looks after all the transactions that take place is the NSE and the BSE. Overall, the stock exchanges are a medium that lists the shares to be purchased by the investors.  

BSE and NSE Differences  

• More than 5000 companies are listed in BSE, while there are less than 2000 companies in NSE. 

• BSE switched to electronic trading in 1995 while NSE supported Automated Trading since its onset. Electronic and automated trading is trading via automation or with the help of a computer. Trading through automation replaces manual work and has several other benefits. 

• Trading volume refers to the number of shares exchanged between companies and investors during trading hours at a particular day. Despite BSE having 5000 companies, the trading volume is low. The trading volume of NSE is high despite having less number of companies (1,600) when compared to BSE. 

• The transaction charge for BSE is 0.003% of total turnover and no charges for Derivatives. The transaction charge for NSE is 0.00325% on Equity and Delivery Trading, 0.0019% on Future Trading and 0.05% of total turnover for Options Trading. 

• For companies to get listed, not more than 25 crores is required in BSE while NSE requires atleast 10 crores.

List of Stock Exchanges in India  

• National Stock Exchange of India Ltd. 
• Bombay Stock Exchange Ltd. 
• India International Exchange or India INX 
• Calcutta Stock Exchange Ltd. 
• Metropolitan Stock Exchange of India Ltd 
• NSE IFSC Ltd. 

Final Thought  

To end with, how would you grade your understanding on stock exchanges after reading this article? Did you find the information valuable enough? The terminologies like National Stock Exchange or Bombay Stock Exchange might sound mouthful but they are apparently harmless. To understand these concepts, you need to get the basics right like “what is stock exchange?” or “what is a stock?” which has also been explained through this article.