The stock exchange is where investors and traders buy and sell securities like stocks, bonds, etc. Stock exchanges have long been where investors purchased and sold publically listed firms’ shares. The role of stock exchange in India is to promote economic growth, investment facilitation, and a regulated marketplace for trading securities. They help the general public in raising capital to do business and improve the country’s overall financial security. The stock exchanges are another essential factor for investor protection because they ensure transaction transparency, correct trading, and compliance with monetary policies. Two primary stock exchanges found in India include the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE), which mainly dictate the outlook of the nation’s financial system.
What is Stock Exchange?
A stock exchange is a formal, organised marketplace where buying and selling are for securities such as stocks, bonds, and derivatives. It serves as an intermediary in bringing buyers together with sellers while ensuring all transactions are performed transparently and efficiently. This provides a market for investors to trade securities for businesses to raise capital and investors to diversify their portfolios.
Major stock exchanges worldwide include the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). These exchanges influence global and national economies by determining stock prices and investor confidence.
The role of SEBI in the stock exchange is to regulate and monitor market activities to provide transparency and avoid fraudulent trading. SEBI (Securities and Exchange Board of India) protects investors and maintains fair market practices.
Role of Stock Exchange in India
Indian Stock Exchange is also a very important capital markets facilitator that serves another major economic function by assisting in economic development, capital formation, and facilitating investor protection. The roles of stock exchanges in India are:
Facilitating Capital Formation
The stock exchange enables companies to raise capital by selling equities to the public. Businesses use the resultant funds to enhance infrastructure development and research. Investors purchase these equities, providing financial support to expand companies and innovation. This then makes it easier for start-ups and giant firms to access capital with no aim of solely depending on bank loans.
Ensuring Liquidity and Easy Trading
Liquidity in stock exchanges is the fact that investors can easily buy or sell shares quickly without major price changes. This stock market feature makes it a great option for individuals and institutions. With high trading volumes, transactions go through smoothly because there is always a trade partner for buyers and sellers. This liquidity also keeps stock prices stable and reduces the risks of finance.
Protecting Investor Interests
Strict rules and regulations are placed in place by authorities like SEBI to prevent fraud, insider trading, and other unfair dealings at the stock exchanges. Even every trade takes place with safe and transparent methods in the hands of investors. Regulations protect the investor from the manipulative hand of the market and ensure companies declare the proper financial information before raising funds.
Promoting Economic Growth
A good stock exchange will enhance economic development because businesses will get the money to expand and innovate. Growing companies create jobs, raise production, and boost national income. This would improve economic development conditions by receiving more income that the government could use to invest more in infrastructure, education, and healthcare.
Promoting Foreign Investments
A smooth stock market receives foreign investors in the country and provides more investment As FII and FDI investors expand the companies, they will grow the company’s exposure on the global level. Investor confidence will make the stock exchange and India an attractive investment destination for international businesses and financial institutions.
Providing Investment Opportunities
Stock exchanges have diversified investment choices, such as shares, bonds, mutual funds, and derivatives. Diversification of an investment portfolio leads to reduced risk and increased possible returns. Comparing this to bank savings, stock investments can generate higher returns over time to help individuals accumulate wealth. Various options make the stock market very popular for long-term investments.
Types of Stock Exchange
Stock exchanges are categorised based on their operations and geographical reach. The two main types of stock exchanges are BSE and NSE.
Bombay Stock Exchange (BSE)
The Bombay Stock Exchange, also known as BSE, was established in 1875 on Dalal Street in Mumbai and can be considered Asia’s oldest stock exchange. BSE is a global player and the 10th largest stock exchange in the world. BSE has played a major role in the growth of the Indian financial sector in years gone by. It is a capital-raising vehicle where companies can raise money to grow their business.
BSE market capitalisation was $4.9 trillion in April, and nearly 6,000 companies are listed in the public market. The index monitoring the BSE performance is Sensex. The Sensex was at an all-time high at 40,312.07 in June 2019 and reflected good performance on the stock exchange, with full confidence from investors about the Indian market.
National Stock Exchange (NSE)
The National Stock Exchange was established in 1992 in Mumbai and is credited with bringing demutualised electronic trading to the country. This institution of NSE was done to break the BSE monopoly, thereby putting in place an open and efficient stock market system. NSE has transformed India’s financial markets using high-technology and automated trading systems. Thus, the trade here was just faster and freer than previously.
It is to be noted that as of March 2016, NSE market capitalisation stood at $4.1 trillion, hence ranking as the 12th largest stock exchange globally. Although its key stock index is NIFTY 50, widely used by investors worldwide to analyse and track the performance of the Indian capital market, NIFTY 50 forms the benchmark for investment decisions by domestic and international investors to understand India’s prevailing economic trends.
| Stock Exchange | Country | Market Index |
| Bombay Stock Exchange (BSE) | India | SENSEX |
| National Stock Exchange (NSE) | India | NIFTY |
| London Stock Exchange (LSE) | UK | FTSE 100 |
| New York Stock Exchange (NYSE) | USA | Dow Jones |
| Tokyo Stock Exchange (TSE) | Japan | Nikkei 225 |
Importance of Stock Exchange
The stock exchange plays an important economic role by providing a structured and regulated investment and capital formation platform.
- Economic Stability and Growth: A stable stock market promotes national economic growth by funding industries and creating employment. It expands activities in businesses; hence, this increases the number of job opportunities even more.
- Investment for the wealthy: The investor makes profits by trading stocks, bonds, and mutual funds. The stock market investment is a long-term wealth creator. Shrewd investing creates money at an interval and secures a good future.
- Transparency and Security: The stock exchanges show real-time updates and financial reports, encouraging a transparent trading platform. It provides investors with adequate trust and less chance of fraud.
- Encouraging Public Participation: The stock market encourages public participation through company investments, fostering a savings and investment culture within the country. More people invest in a strong and active economy.
- Facilitating Government Borrowing: Bonds are issued to the stock exchanges by the governments to raise money for infrastructure development, education, and healthcare. This will create a stable fund for national development and public service.
Role of Stock Exchange FAQs
1. What is the role of stock exchange in corporate governance in India?
The stock exchange governs the corporate governance rules for listed companies with transparency, rigorous financial reporting, and follow-up of ethical business practices.
2. What is the role of SEBI in stock exchange?
The role of SEBI is to regulate market activities within a stock exchange, protect investors, and check fraud to ensure fair trade.
3. How does the Bombay Stock Exchange contribute to India’s economy?
The functions of the Bombay Stock Exchange are to provide a marketplace for trading in securities, aid capital formation, and reflect the country’s economic condition through SENSEX.
4. What are the functions of a stock exchange?
The functions and role of a stock exchange include providing a source of liquidity, discovering prices, protecting investors, and aiding economic growth.
5. How do the stock exchange protect investors?
Another important function of stock exchanges is investor protection, achieved by enforcing strict rules against insider trading so there are no insider transactions.
