In the first part, we looked into the accounts needed for online trading. In this issue, we will look at the stock exchange, the loftiest symbol of capitalism.
The stock exchange (like NSE or BSE) is the “market” where stocks are bought and sold. Any company has to get itself “listed” in a stock exchange if it wants its investors (share holders) to sell their shares to the general public. The listing is decided at the time the company decides to go public (usually through an IPO). A share can be sold only if there is a buyer available to buy it a price acceptable to both. (How this price is reached is very similar to the bargain in our local real market – according to its perceived value; though here, since the price of each transaction is known to everybody instantly, the deal price is reached very quickly). Note that companies can choose to remain private and still sell their shares outside the stock exchange by making a legal contract.
There are registered brokers with each exchange, and all transactions take place only through them. The stock exchange takes a “cut” for each transaction (that’s how they make profits, this is capitalism at its highest point- nobody does anything for free!) The trading account company mentioned in the last article is usually the broker associated in online trading.
Why do we need two exchanges? Like everything in capitalism, they actually compete against each other. The BSE is the older of the two and has a large number of companies listed. The NSE is much more modern (including in technology), and though not as many companies are listed in NSE, the net volume of transactions is much more than in BSE. There are also many other regional stock exchanges, including one in Kochi. Usually, the regional companies list in these exchanges, and the volumes traded are much lower. By the way, a share bought on NSE cannot be traded in BSE and vice-versa.
In a stock exchange, there are many types of investors, like retail investors (the individual investor), the HNI (High Net-worth investor: those who can spare a couple or crores), the QIB (Qualified Institutional Buyer: the mutual funds and insurance companies), and the FII (Foreign Institutional Investors). Since you are reading this free site, you are probably a retail investor :). This distinction is important, since the government has mandated that all companies have atleast 25% of their stocks with the retail investor in the next 5 years. Since all the other types of investors are in fact, controlled by a few individuals, the presence of such a large proportion of retail investors makes manipulation of the stock price very difficult.
In the next issue, we will look at how a company becomes public through that always-heard term – the IPO.