Invest in stocks, shares, equity. In fact no talk on investment is complete without mention, if not discussion, of the stock market. We often read or hear that and things like World over, and even in India, stocks have outperformed every other asset class over the long run. Stocks are probably the best bet against inflation too. We want to invest in order to create wealth or make money grow as we all want more money. This article is about what is stock, what is stock exchange, the stock exchanges in the world, who owns and controls the stock exchange, how stock exchanges have evolved from trading floor to online trading. What is Index?
Table of Contents
What is a stock?
As per dictionary, Stock is : The total merchandise kept on hand by a merchant, commercial establishment, warehouse, or manufacturer. It represents supply. One may have a stock of of pencils in the desk or T-shirts in the cupboard. In the financial market, stock refers to a supply of money or capital raised by a corporation through the issuance and distribution of shares. This supply comes from people who have given money to the company in the hope that the company will make their money grow.
But why would company allow people to invest in it, these people would be sharing its profits!, The simple answer is because companies need money! There are two ways for companies to raise money for long-term business investment – they can borrow it and/or they can issue shares – otherwise known as stocks. In the world of corporate finance, stocks are called equity capital. If company borrows money it needs to pay interest but by issuing shares it gets money and it also gets people to share with it the risk too. A person or organization which holds share of stocks is called a shareholder. The holder of a stock is entitled to the company’s earnings and is responsible for its risk for the portion of the company that each stock represents The aggregate value of a corporation’s issued shares is its market capitalization. The distinction between stocks and shares is somewhat blurred and these words are used interchangeably. Investopedia explains this subtle difference.
What is a stock market?
We know a market is a public place where things are bought and sold. Example In a cloth market cloth is bought and sold. Similarly, in stock market stocks are bought and sold. The stock market is not a specific place, though some people use the term Wall Street to refer to the U.S. stock market or Dalal Street to refer to Indian stock market. But Wall Street or (Dalal Street) is the place where the biggest stock exchange of USA(India), NewYork Stock Exchange (Bombay Stock Exchange) is located.
Video on What is Stock Market
What is a stock exchange?
An exchange is an institution, organization, or association which hosts a market where stocks, bonds, options and futures, and commodities are traded. Buyers and sellers come together to trade during specific hours on business days. We can compare stock exchange to a supermarket that sells a variety of things in one place offering convenience to customers. It’s more convenient buying from the supermarket that going to different shops or buying from the farmer and the baker. The stock exchange is a supermarket for stocks. It can be thought of as a big room where stocks are sold and bought. If a particular company is traded on an exchange, it is referred to as “listed”.
Just as there are many supermarkets in an area or many Khans in the Bollywood industry, a country can have more than one stock exchange. Two famous stock exchanges of India are Bombay Stock Exchange(BSE), National Stock Exchange(NSE). As of June 2011, there are over 5,085 listed Indian companies in BSE and over 1,550 listings on NSE.
Every country has its own stock exchange. Major stock exchange are shown below.
Some Stock exchanges of the world
The first stock exchange was Amsterdam Stock Exchange established in 1602 in the Netherlands and it traded shares of the Dutch East India Company
Major stock exchange, actually Top 20, groups of issued shares of listed companies, as of 30 April 2018.
Stock Market moving From Trading floor to Electronic Trading
Earlier when agricultural goods were traded between companies and brokers. A stockbroker is someone who performs transactions in stock on a stock market as an agent of their clients who are unable or unwilling to trade for themselves. The brokers and companies met at an assigned place. For example, BSE traces its history to the 1850s, when four Gujarati and one Parsi stockbroker would gather under banyan trees in front of Mumbai’s Town Hall. As the number of brokers increased, the location of these meetings changed many times and finally, they moved to a specific place and the place where trading activity happened was called as the trading floor. In India, the group (BSE) eventually moved to Dalal Street in 1874 and in 1875 became an official organization known as ‘The Native Share & Stock Brokers Association’.
Trading floor of BSE
Trading floors are found in the buildings of various exchanges, such as the New York Stock Exchange and the Chicago Board of Trade. The trading floor is also referred to as “the pit” of an exchange, due to the hectic nature of the area.
As with many other industries, the Internet has revolutionized stock trading, giving anyone with an online trading account the power to execute their own stock purchases. With the advent of electronic trading platforms, many of the trading floors that once dominated market exchanges have started to disappear as trading has become more electronically based.
Did you know:Open outcry is the name of a method of communication between professionals on a stock exchange or futures exchange which involves shouting and the use of hand signals to transfer information about buy and sell orders.
The London Stock Exchange moved to electronic trading in 1986, New York Stock Exchange in 2006-2007. Bombay Stock Exchange switched to an electronic trading system in 1995. It took the exchange only fifty days to make this transition. This automated, screen-based trading platform called BSE On-line trading (BOLT) currently has a capacity of 8 million orders per day.
A very interesting article on Outlook India Business on the history of BSE. Read here.
Who owns the stock exchange?
As we know an exchange is an institution, organization, or association. It can be owned by Government as in Shanghai Stock Exchange or it can be owned by organizations. For example NSE is largely owned by banks and insurance companies such as Life Insurance Corporation of India, State Bank of India (Promoters Detail at NSE). Likewise, the BSE is about 40% owned by brokers, with other outside investors and domestic financial institutions owning the rest.(Details)
Who controls the stock exchange?
The stock market in each country now is governed/controlled by the corresponding governing bodies in that country. Ex: SEC (Securities Exchange Commission) for USA , SEBI (Securities & Exchanges Board of India) for India. Earlier Stock Exchanges in India were continued to be regulated directly by the Government of India. In the year 1988 the Government of India constituted SEBI to act as the independent regulator of Stock exchanges, the primary market, Mutual Funds etc. Securities Scam of 1990-91 mastered by the stockbroker Harshad Mehta, exposed by journalist Sucheta Dalal, prompted Government to make SEBI a statutory and autonomous regulatory board with responsibilities, to cover both development & regulation of the market.
What is the index? What are Sensex and Nifty 50
Just as the average marks in a class test tells you how the class has fared in the test, the stock index tells you the general health of the stock market. It would be too difficult to track every single security trading in a country. To get around this, a smaller sample of the market that is representative of the whole is taken. If the stock market is doing well, then the prices of stocks tend to rise in what is known as a bull market. If it’s doing poorly, prices as a group tend to fall in what is called a bear market. Sensex is an index that captures the increase or decrease in prices of stocks of 30 companies that are traded on the Bombay Stock Exchange. Nifty is the Sensex’s counterpart on the National Stock Exchange and comprises of 50 companies. More about the index and how it is calculated in another post.