Stock exchange

The essentials

A stock exchange is an institution that provides a platform for buying and selling existing securities. The Securities Contracts (Regulation) Act, 1956 defines it as a body of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities. Major stock exchanges in India include the Bombay Stock Exchange (BSE) and the National Stock Exchange of India (NSE).

Key points

• Functions: providing liquidity and marketability to existing securities, pricing of securities through demand and supply, safety of transactions (members are regulated within a legal framework), contributing to economic growth by channelling savings into productive investment, spreading the equity cult (encouraging people to invest in shares), and providing scope for healthy speculation.
• Trading procedure: selecting a broker (a SEBI-registered member of the exchange), opening a demat account with a depository participant, placing an order with the broker, executing the order on the online trading system, issue of a contract note by the broker, delivery of securities or payment of money, and settlement through the clearing house.
• Dematerialisation: converting physical share certificates into electronic form held in a demat account. It removes problems of theft, forgery, loss and delays in transfer.
• Depository: an institution that holds securities in electronic form. India has two depositories: National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL). Investors deal with them through depository participants (DPs), such as banks and brokers.

Exam tips

• The contract note is issued by the broker after the order is executed, as a record of the deal.
• A demat account is like a bank account for securities.

Common mistakes

• Saying the stock exchange issues new shares. It deals in existing securities.
• Confusing a depository (NSDL or CDSL) with a depository participant (the intermediary through whom investors deal).