Stock exchanges are marketplaces where shares are bought and sold. Companies looking to raise funds can issue shares on stock exchange, i.e essentially sell shares. Market Participants (other companies, retail investors, banks, insurance firms etc) buy these shares, allowing sellers to raise the required amount. Once shares are bought by market participants the shares are considered to have gone “public”. These shares can now be bought and sold at will on the stock exchange by the market participants. Price of each share is determined by laws of demand and supply. Higher the demand, greater the share price and vice versa. Most of the trading in India takes place on two major stock exchanges, namely the BSE (Bombay stock exchange) and the NSE (National stock exchange). NSE is the biggest stock exchange in India, in terms of total volume of shares bought and sold.
Like shares, other instruments such as options, futures,bonds etc. are also traded by market participants on exchanges. Only registered market participants/members can trade on stock exchanges. So when retail investors want to buy or sell shares they need to do so through these registered members, who are called “stock brokers”. These brokers get the investor to open an account with them, which allows them to access all the required details of the client. Stock brokers then act as middlemen between investors and exchange and facilitate buying and selling of shares, in return they charge a brokerage fee for their services.
Exchanges play a very important role in the economic growth of the country. Economy grows when new jobs are created, new jobs are created when companies open new factories, new factories are opened when firms have sufficient funds required to make these investments and exchanges help these firms raise funds for investment.
Let’s now understand how trades are executed and orders are placed at an exchange.