What is a Stock Exchange?
A stock exchange is a place for buyers and sellers of financial securities. Stock exchanges facilitate trading transactions for listed financial assets like shares, bonds, commodities, futures, and options, etc. Stock exchanges bring liquidity to the market. Each trade you place in the stock market is processed on a relevant stock exchange. Most shares are listed on major stock exchanges.
BSE and NSE are the two largest stock exchanges in India. Their indexes – Sensex and NIFTY, help investors to make investing and online trading decisions in the mirror as they show the market position in real-time. BSE, established in 1875, has a global presence in the world economy with 5000+ national and international listed stocks. There are twenty-one stock exchanges in India.
Key Functions of the Stock Exchange
Liquidity and Marketability: The stock exchange facilitates high liquidity in the stock market. Investors can quickly relieve and reinvest their funds when they want. The securities can be sold anytime and converted to cash during the trading session.
Price Determination: In the secondary market, the supply and demand mechanism is the only way to determine the price of securities. Stock exchange values the securities constantly to determine the prices that can be tracked via its index.
Safety: Stock exchanges are strictly governed and regulated by the SEBI, ensuring all transactions occur per the legal framework. Market participants can get assurance of a safe place to trade the securities.
Steps in the Trading Procedure on the Stock Exchange
- Connect to a broker to open a demat and trading account
Individuals need to open a demat account with a stockbroker because all securities are now issued in digital format. You can not trade physical securities anymore. Therefore, a Demat account is required to hold such securities electronically.
Any of the two depositories in India, NSDL (National Securities Depository Ltd.) and CDSL (Central Depository Services Ltd.), maintain securities you hold in a Demat account with a stockbroker and keep informing you about the status of their holdings whenever you buy or sell securities. Look at the demat account maintenance charges and brokerage fee while shortlisting a stockbroker.
Using your trading account, you can place trade orders to buy or sell securities at an expected price. The broker will forward your order to the stock exchange.
- Trade Execution on Stock Exchange
- Whenever an individual places a trade order on the broker’s trading platform, the broker forwards the trade to the relevant stock exchange immediately.
- Then the stock exchange matches the order. It searches for an individual looking for the same quantity of the same security at the same time.
- Once it matches the buyer and seller’s requirements, the order gets executed.
- Trade Settlement
Clearing corporations settle the securities and trade transactions in the buyer and seller demat and bank accounts.
Every stock exchange has clearinghouses that play a vital role in online trading. Every stock exchange has its clearing house. The “clearing” in the online trading system refers to the arrangement in traders’ accounts related to the trade transaction. After a successful trade settlement, the securities are deducted from the seller’s demat account and credited to the buyer’s demat account. The trades on exchanges are executed on a “T+ days” basis to complete the clearing and settlement process.
The time for trade clearance and settlement differs for different types of securities. Currently, the SEBI allows exchanges to choose from “T+2” or “T+1” days for trade settlement. And as per its recent reform, Before April 2003, exchanges took T+5 days for the transaction settlement.
Thus, this is the right trading procedure for online trading on a stock exchange. You can learn about the type of orders to know more about the online trading process on stock exchanges.
