In this blog post, Prakhil Mishra, a student of Institute of Law, Nirma University, Ahmedabad, who is currently pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, gives an insight into how a stock exchange works as an intermediary between companies and investors.
What is a stock exchange?
In the mid 16th century when the Europeans started looking for business opportunities in Asia and America, the big people felt that they wanted a lot of money and this demand was not being fulfilled by the kings of that epoch. The wealthy guys demanded a lot of interest and taking a loan from them is always a very risky venture. Thus, they felt they need to raise money from a bunch of common people. Thus, in 1602, the Dutch East Indian company became the first company to issue shares of its company in the Amsterdam Stock Exchange and get traded on a continuous basis. This is how a very important segment of the secondary market has come into existence.
The stock exchange is a market where the securities are bought and sold. It is a place where the public companies’ shares are traded and issued through exchanges and over the counter markets. To understand stock exchange, it is essential to know about the stock market.
The stock market is a juncture which provides a scope for investors to contribute to the achievements related to finance of the companies whose shares they hold in equity. In a free market economy, stock market plays a vital role in selling the shares of the companies to the people which consequentially gets exchanged by a proportion of ownership in the hands of investors. It envisages its growth by collecting small initial sums and making it large over time. It involves minimal risk for them to do so. A stock exchange to that instance would be a more specific area where the trading is executed. It is the place where actual business is done. It is a very important figure in raising capital of the companies listed on it as it is a hub of the primary and secondary market. At present, there are 21 stock exchanges in the country of which National Stock Exchange and the Bombay stock exchange are the largest ones.
To invest through a stock exchange, people may either register themselves as the member of a particular stock exchange or they may do it indirectly through a broker. A stock exchange has a relevance of its own because for a company which is going for Initial Public Offerings; it is a pre-requisite to list its specified securities in at least one recognized stock exchange having nationwide trading terminals. The stock exchange is the backbone of Equity Market in India. The dominating players of this market are NSE and BSE. Their remarkable indices NIFTY of NSE and SENSEX of BSE is always keenly observed and monitored by the investors. This stock market helps several ways such as:
- In raising capital of the companies
- It helps in mobilizing savings for investment so that people may invest in diversified domain
- It facilitates the growth of the company in several aspects by acquisition and fusion.
- It is always a challenging task for any business to get listed on a stock exchange and it has to fulfill and comply with certain stringent rules which consequently give a wide range of corporate governance.
- The stock exchange is a booth for small investments. It encourages through its schemes and incentives the small investors who are not willing to make a mammoth investment to make the investment in it. As it is seen that the number of small investors is much more so, it allows a wide range of small investments.
- It helps in raising governmental money for the governmental projects related to different developmental activities.
- Most importantly what a stock exchange does is that it provides current economic trend going on in the country. It acts as a barometer.
In this article, we are focusing on the importance of Stock exchange in raising capital of the businesses.
How does a stock exchange raise capital?
The Securities which are traded on a stock exchange are shares issued by the companies, unit trusts, and other pooled investment products and bonds. The stock exchange is a secondary market for Initial Public Offerings done by public companies. It is markets where in the first instance businesses crack their securities issuance. It helps secondary markets to facilitate companies, governments, and other groups to obtain finance through debt or equity based securities. For example, NSE’s vast network provides an imperative infrastructure backbone for conducting online IPOs through the Book Building process. Issuers can access the various markets situated in the most remote areas of the country, through the NSE’s Book Building process called NEAT IPO. NSE’s reverse Book building mechanism offer issuing company to buy back company stock from the market. The NSE system offers a nationwide bidding facility in securities.
What a stock exchange does is that it provides investors with the quotations of the investment. It is being done by publishing the stocks of all the companies on a common portal for the convenience of the investors. With this, investors convey their wish to buy shares of a particular company, and that is being communicated to the respective company and lieu of that company provides a share certificate to that investor.
Stock exchanges are accurately named. They are organizations where money can be exchanged for securities or securities for money. It is for this reason that they are often referred to as capital markets since it is in the capital that their dealings consist. The Stock Exchange itself never buys or sells securities, but is an association which provides facilities and rules under which its members can deal in securities with each other. Its true function consequently consists in bringing buyers and sellers of securities together and thereby increasing the negotiability of the stocks and bonds in which dealings are allowed. Naturally, the Stock Exchange itself does not fix or establish security prices; these depend on the conditions of supply and demand expressed on the Stock Exchange, but originating from all parts of the country.
Stock exchange acts as an intermediary between the investors and the companies. It is a channel whereby all the securities are listed, issued and traded in a day to day business. It also provides the data related to financial statistics of the country. It gives a parameter to judge the economic status of the country. Therefore, stock exchange is very cardinal when it comes to the open market economy and government. It becomes incumbent to seek a platform whereby proper listing of the securities and trading of the same could be done, and Stock Exchange provides the said platform.