Now that we have understood the power of investing and the basic introduction to the stock market in our previous posts, we shall go further to understand more about the share market.
If you are new to this series of posts, we recommend you to start reading from here.
Consider this scenario. You go to a supermarket. You shop what you need. Then you go to a cash counter to exchange your money with the goods you shopped. The share market works the same way. Here you go to the share market, you select the shares of your choice.
But how do you exchange your money with the shares you wanted to buy? Here comes the role of stock exchanges. Stock exchanges serve the purpose of a cash counter in the supermarket.
What is a stock exchange?
A stock exchange is an organized platform, where traders can buy and sell the shares of different companies. You might have heard the words NSE and BSE at least once in your life. India has two main stock exchanges – the National Stock Exchange (NSE) and the older Bombay Stock Exchange (BSE). Let’s learn more about them
National Stock Exchange (NSE)
The National Stock Exchange is the country’s leading stock exchange, with headquarters in Mumbai. It was incorporated in 1992 and, since then, has evolved into an advanced, automated, electronic system offering trading facilities to investors across the country. In 2015, this exchange system ranked in fourth place in the world according to the metric of its trading volume.
Bombay Stock Exchange (now known as BSE limited)
The BSE or the Bombay Stock Exchange is a lot older than its cousin (NSE). It was Asia’s first stock exchange. The BSE does have some interesting history.
A group of five stockbrokers used to conduct meetings under the banyan tree in front of Mumbai Town Hall, where traders would gather together to buy and sell shares. As the number of brokers increased, they started changing the venue of the meeting constantly. Almost two decades later, this small group moved to Dalal Street in 1874, and later, in the following year, it was recognized as an official organization by the name of the Bombay Stock Exchange in 1875.
As we have seen earlier that you can only buy shares of a company that has entered the share market. By that we mean, companies entering (listing) either into NSE or BSE or both. How many such companies are there in NSE and BSE? There are over 5000 companies listed in BSE and over 1600 companies listed in NSE. That means you can only buy shares of these companies.
Now that we have understood about stock exchanges and also we have seen India’s two major stock exchanges, now we shall have a look at stock market indices.
Now let us again consider a scenario. If you were asked to give a real-time update on the traffic situation in your city, how would you possibly do it?
Your city may have 1000’s of roads, junctions, and gullies. It is unlikely you would check every bit in the city to find the answer. The wiser thing for you to do would be to quickly check, a few important roads and junctions across the city, and observe how the traffic is moving. If you observe chaotic conditions then you would simply summarize the traffic situation as chaotic, else traffic can be considered normal.
In the same way, to track the performance of all the companies in the share market, it is enough to track the performance of some big companies in the market.
With that here comes the role of a stock market index. So if I were to ask how the market is moving today, you can simply look at the stock index. If the index is moving up you say the markets are up otherwise, markets are down.
Let us know more about it.
What is a stock market Index?
A stock market index is an indicator that measures the stock market and shows changes taking place in the market. Hundreds and thousands of companies are listed on both the exchanges but indices are a gauge of only a few top-performing companies.
This is done to reduce the clutter and to indicate the true position of the market. Bigger and better companies lead the economy and the country’s financial health hence this is the rationale behind keeping only the big companies in the indices.
So any changes taking place in these big companies impact the overall value of the index. If the prices of most of the underlying companies rise, then the index will rise and vice-versa.
In this way, a stock index reflects the overall market sentiment and direction of price movements of the underlying companies. Let us have a look at the Indian stock market indices.
Sensex, which stands for ‘Stock Exchange Sensitive Index’, is the stock market index for the Bombay Stock Exchange. That means Sensex comprises only the 30 largest and most actively traded stocks on BSE, providing a gauge of India’s economy. The Sensex is one of the oldest stock indexes in India. It was introduced in 1986.
Sensex truly reflects the Indian stock market movement. If the Sensex value increases it means that there is a general increase in the prices of shares whereas if the Sensex decreases it means there is a general decrease in the price of shares.
Nifty stands for ‘National Stock Exchange Fifty’ and is the index for the National Stock Exchange. The Nifty generally comprises of 50 actively traded stocks in NSE. Nifty is also known as Nifty50 or CNX Nifty. It was introduced in 1996.
Like Sensex, it also reflects the Indian stock market movement.
Now we shall see have a glance at the guy ‘SEBI‘. You might have also heard this term ‘SEBI’ a lot. Let us now understand the role of SEBI in the share market.
Securities and Exchange Board of India (SEBI)
Where money is involved, human emotions in the form of greed and fear run high. One can easily fall prey to these emotions and get involved in unfair practices. We have seen many of those practices such as Satyam computers scam and the like.
Given this, the stock markets need someone who can set the rules of the game and force investors (like you and me) to stick to these rules, thus making the stock market a level playing field for everyone. These rules are set by the regulators of the industry. In India, the stock market regulator is called SEBI. It was established on 12 April 1988.
Like the security checks and CCTV cameras at the supermarket, SEBI always watches the activities going on in the share market. So the objective of SEBI is to promote the development of stock exchanges, protect the interest of investors, and regulate the activities of the market participants.
That is all for this post. In the next post, we shall understand more concepts about the share market.
Thanks for reading. Stay safe.