History of Indian stock market

Summary

Investing in stocks today looks like a fairly easy process. But it has come a
long way. Let’s take a quick trip down memory lane to know how the stock
market has evolved in the country.

Trading of securities in India dates to the 18th century when the East India
Company began trading in loan securities.

1830s: During this decade, corporate shares started being traded in Mumbai.
Most notably, stocks of banks and cotton presses were traded during this time.

1850s: The first version of a stock exchange came into existence during this
decade. It started with a group of brokers finding a location in Mumbai’s
Horniman Circle.

1874: As more brokers jumped onto the bandwagon in downtown Mumbai,

Dalal Street was born. Today, Dalal Street has become a metonym for the
entire Indian financial sector, much like Wall Street is in the US.

1875: The small group of brokers formed ‘The Native Share & Stockbrokers
Association’ that is today known as the BSE (formerly Bombay Stock
Exchange).

Over the late 19th and early 20th century, exchanges cropped up at
Ahmedabad, Calcutta (now Kolkata) and Madras. But BSE remained the
dominant exchanged, as it was located in Mumbai, which had emerged as the
country’s leading commerce hub. And yet, trading in stocks remained restricted
to a limited group of people.

1956: India passed the Securities Contracts Regulation Act, which formalised
stock trading.

1964: The newly-created UTI launched India’s first mutual fund scheme, the
US 64. The scheme raised Rs 6,400 crore by 1988, making UTI the big player
in the Indian market.
1977: Dhirubhai Ambani’s Reliance Industries, with interests in textiles and
petrochemicals, listed. The IPO garnered huge interest from retail investors
kickstarting the ‘cult of equity’.

1986: On 1st January this year, BSE SENSEX, a 30-share index was
established. This was the country’s first equity index with base year as 1978-79
and base value of 100.

1988: This period was marked by a lack of transparency and undependable

clearing and settlement systems; making it imperative to set up a financial
market regulator. Hence, the Securities and Exchange Board of India (SEBI)
was established. However, it was not until 1992 that it was granted statutory
power.

1992: The National Stock Exchange of India Limited (NSE) was established. It
was around the same time that interest in stock market spiked sharply, thanks to
the bull market led by Harshad Mehta.

1994: NSE became the first Indian exchange to provide a modern, fully
automated screen-based electronic trading system.

1996. The NSE launched Nifty 50 index on April 22 this year. The Nifty 50
is a benchmark Indian stock market index that represents the weighted
average of 50 of the largest Indian companies listed on the National Stock
Exchange.

Earlier, the Nifty 50 index was calculated based on full market capitalisation
methodology. However, after June 26, 2009, the computation was changed to a
free-float methodology. The base period for the Nifty 50 index is November 3,
1995, and the base value of the index has been set at 1,000.

It’s been a long journey but today India is among the top five stock markets in
the world by market capitalisation. It has been among the most well-performing
markets of the world. For instance, the Sensex has grown at a CAGR of 15%
over the past 20 years and 16% since inception.

How many stock exchanges are there currently?

After independence, 23 stock exchanges were added to compete with BSE.

However, in 2012 SEBI said that stock exchanges whose net worth was less
than Rs 100 crore and turnover less than Rs 1,000 crore will be closed by 2015.

At present, there are only seven recognised stock exchanges in India.

  BSE
 NSE
 Calcutta Stock Exchange
 Magadh Stock Exchange
 Metropolitan Stock Exchange of India
 India International Exchange (India INX)
 NSE IFSC

What is Share Market? What is the history

of the Indian Share Market?
The history of the Indian stock market is a remarkable journey of financial

development in India. It dates back to the late 18th century when the East India

Company issued bonds and shares. In the 19th century, formal stock exchanges,

including the iconic Bombay Stock Exchange (BSE), were established.

The late 20th century brought transformative changes, with the inception of the

National Stock Exchange (NSE) in 1992, introducing electronic trading and fostering

transparency. The introduction of key indices like the BSE Sensex and Nifty 50

became vital benchmarks for monitoring market performance.

The history of stock exchange in India demonstrates that it has encountered

numerous obstacles and difficulties. Scandals, such as the Harshad Mehta scam in
the 1990s and the Ketan Parekh scam, underscored the need for regulatory

enhancements. The 2008 global financial crisis also had a significant impact.

The Indian share market has thrived amid economic reforms, liberalization, and

globalization. It continues to attract domestic and international investors, reflecting

India's economic growth. Over the years, it has transitioned from a small, informal

marketplace to a sophisticated, well-regulated financial ecosystem, playing a pivotal

role in India's economic development.

What is the Share Market?

A stock exchange is “a body of individuals, whether incorporated or not, constituted

to regulate or control the business of buying, selling or dealing in securities.”

“Securities refers to shares, bonds, scrip, stocks, debentures stock, and other

marketable securities of incorporated companies or similar, government securities,

and rights or interest in securities.”

In India, the share market is a term used to refer to the two major stock exchanges in

the country— the Bombay Stock Exchange (BSE) and the National Stock Exchange

of India (NSE). There are also 22 regional stock exchanges.

History of Stock Exchange in India (18th Century - 20th
Century)
18th Century:

 The history of stock market in India can be traced back to the late 18th

century when the East India Company issued bonds and shares to raise

capital for its operations. This was the first share market in India where

securities were informally traded among merchants in the region.

 The trading floor was under the shade of a sprawling banyan tree opposite the

Town Hall in Mumbai. A few people would meet under this tree to informally

trade in cotton. his was because Mumbai was a busy trading port, and

essential commodities were traded here often.

 The Companies Act was introduced in 1850, following which investors started

showing an interest in corporate securities. The concept of limited liability also

put an appearance around this time.

 By 1875, an organization known as ‘The Native Share and Stock Brokers

Association’ came into being. This was the predecessor of the BSE.

 In 1894, the Ahmedabad Stock Exchange came primarily to enable dealing in

the shares of textile mills in the city.

19th Century:

 During the 19th century, regional stock exchanges were established in major

Indian cities.

 This was because Mumbai was a busy trading port, and essential

commodities were traded here often.

 The Companies Act was introduced in 1850, following which investors started

showing an interest in corporate securities. The concept of limited liability also

put an appearance around this time.

 By 1875, an organization known as ‘The Native Share and Stock Brokers

Association’ came into being. This was the predecessor of the BSE.

 In 1894, the Ahmedabad Stock Exchange came primarily to enable dealing in

the shares of textile mills in the city.

Post-Independence (1947):

After India's independence in 1947, the stock market underwent changes to adapt to

the new economic environment.

When Stock Market Started in India (1950s - 1960s)

  1950s: Formal stock market trading continued to evolve in India, with several

regional stock exchanges becoming operational. However, the market

remained relatively small and primarily served the needs of British colonial

authorities and their commercial interests.

 1960s: During this decade, the Indian government introduced the Securities

Contracts (Regulation) Act in 1956, providing the first legal and regulatory

framework for stock exchanges and securities trading in India. This was a

significant step in the development of the Indian stock market.

Who Started Stock Market in India (Late 20th Century)

 Late 20th Century: The late 20th century marked a significant transformation

in the Indian stock market. In 1992, the National Stock Exchange (NSE) was

established, introducing electronic trading and modern technology to the

Indian stock market. It played a vital role in bringing transparency and

efficiency to the market.

Nifty and Sensex (1990s)

 1990s: The NSE introduced the Nifty 50 index, providing a benchmark for the

performance of the Indian stock market. The Bombay Stock Exchange's

 Sensex (S&P BSE Sensex) also became a prominent stock market index

tracking the top companies listed on the BSE.

Scams in Indian Share Market (1990s - 2000s)

 1990s: This decade saw the infamous Harshad Mehta scam, which involved

manipulation of the stock market using illegal funds. It raised questions about

the need for regulatory oversight.

 Early 2000s: The Ketan Parekh scam was another significant event in Indian

stock market history. It involved fraudulent trading practices and led to

regulatory changes.

 2008: The global financial crisis of 2008 had a substantial impact on the

history of Indian stock exchange, causing a significant market correction.

Economic Reforms and Globalization (1991 - 21st Century)

 1991: India initiated economic liberalization and reforms, attracting foreign

investment, removing trade barriers, and privatizing state-owned enterprises.

These reforms transformed the Indian economy and stock market.

  21st Century: The Indian stock market continued to grow, attracting both

domestic and international investors. It witnessed periods of bullish trends and

corrections, reflecting economic conditions.

Demutualization and Regulatory Framework (Early 21st Century)

 Early 21st Century: Indian stock exchanges underwent demutualization,

separating ownership and management. This made stock exchanges more

competitive and efficient.

 Regulatory Framework: The Securities and Exchange Board of India (SEBI),

established in 1988, continued to play a crucial role in regulating and

supervising various aspects of the Indian stock market to ensure transparency

and investor protection. In 2015, SEBI was merged with the Forward Markets

Commission (FMC) to strengthen commodities market regulation, facilitate

domestic and foreign institutional participation, and launch new products.

Online Trading and Technology Advancements (21st Century)

 21st Century: The proliferation of online trading platforms, enabled by the

internet and technological advancements, made it easier for investors to

participate in the stock market.

Current State of Indian Stock Market

Today, the BSE’s market capitalization is likely to be around $3.8 trillion and the

market capitalization of the NSE is estimated to be over $3.71 trillion.

The exchanges are still on parity in terms of share trading volumes. Nowadays,

people can conduct online trading sitting in their homes. Facilities such as zero

brokerage Demat and live updates are available.

Investor Education and Awareness (Ongoing)

 Ongoing: Various initiatives and awareness campaigns have been launched

to educate investors about the stock market, risk management, and financial

literacy.

The history of Indian stock market has come a long way from its early days as a

small, informal trading platform to a sophisticated and well-regulated financial

marketplace. It has played a critical role in India's economic development, providing

opportunities for investors while facing challenges and setbacks that have led to

improvements in regulatory and governance practices.

Function of stock Exchange

What are the functions of Stock Exchange?

Functions of Stock Exchange:

1. Marketability of securities

Stock exchanges are the markets for purchasing and selling securities. As they provide a
ready and continuous market for securities, the securities can be converted into cash
without delay.

2. Evaluation of securities

In stock exchanges, prices of securities are determined by investors’ demand and

suppliers’ preferences. Stock exchanges integrate the demand and supply of securities
and determine their prices on a continuous basis. The prices prevailing in the stock
exchanges are called quotations. These quotations enable the investor to evaluate the
value of his shareholding.

3. Safety of investment

Stock exchanges operate under the rules, bye-laws and regulations duly approved by
the government. The members of stock exchange are bound by them. Stock exchanges
provide the most perfect type of market by making the transactions publicly known to
the investors. Besides this, they avoid over trading and speculation through various
regulatory measures. These factors ensure a great measure of safety and fair dealing to
the investors.

4. Capital formation

Capital formation occurs due to savings and investments. Stock exchanges facilitate
capital formation in the country. They create the healthy habit of saving, investing and
risk bearing among the investors. The prices quoted in stock exchanges indicate the
extent of popularity of companies. Investors are attracted towards profitable companies
and come forward to invest their savings in the corporate securities. Thus, stock
exchanges facilitate flow of capital into more profitable channels.

5. Regulation and Motivation of Companies

Companies wishing to list their shares on a stock exchange should follow certain rules
and regulations. For example, every year, they should submit to stock exchange all
relevant data relating to their financial affairs. So, the listing companies will safegurad
their interest by monitoring their financial performance carefully. Thus, the stock
exchanges by quoting the prices of securities motivate the companies concerned to
improve their financial performance.

Functions of Stock Market

The stock market constitutes stock exchanges where financial instruments such as
stocks/shares, bonds and derivatives are bought and sold. The buyers and sellers come
together to trade these securities at the stock exchanges. Thus, the primary functions of stock
market are facilitating a trustworthy financial marketplace for investors & businesses, where
businesses trade their shares publicly to raise capital and make shareholders a part of their
growth journey, whilst the exchange protects investors’ interests by ensuring transparency,
liquidity and fair pricing.

The stock markets can be divided as primary markets and secondary markets. In the primary
market, companies issue initial public offerings (IPOs) and sell a percentage of equity for the
first time to the public. They raise the required capital from investors with the help of an IPO.
Once the company is listed in the exchange, the shares can be sold & purchased in the
secondary markets during the market hours.

The stock markets are also called as equity markets/ capital markets and act as a critical
component of an economy. It facilitates the flow of capital from investors to businesses
seeking funding. This capital infusion allows companies to expand operations, invest in
research and development, fostering innovation, economic growth, and job creation. At the
same time, markets also provide the investors (individuals and institutions) with the
opportunity to earn returns on investments through dividends and capital appreciation.

List of Popular Stock Exchanges

In India, two prominent stock exchanges dominate the landscape: the Bombay Stock
Exchange (BSE) and the National Stock Exchange (NSE).

BSE

Established in 1875, BSE has an illustrious legacy as Asia's oldest stock exchange. The BSE
has been a cornerstone of India's financial evolution, facilitating capital mobilization for
businesses through its well-regulated platform. In 2017, BSE became India’s first listed stock
exchange. Its iconic S&P BSE Sensex index is India’s most tracked benchmark Index. It is
traded internationally as well on EUREX and BRCS (Brazil, Russia, China & South Africa).
In 2017, BSE launched India INX, India's 1st international exchange, located at GIFT CITY
IFSC in Ahmedabad, Gujarat.

NSE

With its cutting-edge electronic trading platform, NSE has revolutionized stock trading in
India. In 1994, it became the first Indian exchange that implemented electronic or screen-
based trading. It is a pillar of India's financial landscape and stands as a symbol of modernity
and innovation. It offers seamless transactions and protects investor interests by offering
transparency and real-time information. As the preferred choice for millions of traders, NSE
has propelled India's capital markets to new heights. Its major indices like Nifty 50 guide
market trends.

Functions of Stock Market

Stock markets serve a range of essential functions in the financial system of an economy.
Some of the key functions of stock markets for investors as well as companies are:

Capital Formation

One of the primary functions of the stock market is to facilitate the raising of capital for
businesses. Companies issue stocks (equity securities via IPO Investment ) to raise funds for
various purposes such as expanding operations, investing in new projects, and research and
development. By purchasing these stocks, investors provide the necessary capital that helps
businesses grow and create economic value.

Liquidity

The stock market provides liquidity to investors by offering a platform where they can buy
and sell stocks easily. This liquidity is important as it allows investors to convert their
investments into cash relatively quickly. It also encourages investment by providing an exit
strategy for investors who want to sell their holdings.

To take advantage of this liquidity and participate in buying and selling stocks, individuals
can open trading accounts with Religare, facilitating their access to the stock market.

Price Discovery
The stock market is a market where prices are determined based on the supply and demand of
stocks. It serves as a platform for investors to express their opinions about the value of a
company. The constant trading of stocks leads to the establishment of market prices that
reflect investors' perceptions of a company's current and future performance.

Wealth Creation

This is a crucial function of a stock market. Investors can generate wealth by purchasing
shares of companies that experience growth in their stock prices. This growth leads to capital
appreciation, benefiting individual investors.

Dividend Income

Owning shares of a company entitles investors to a portion of the company's profits in the
form of dividends. This provides a consistent income stream to shareholders.

Transferring Risk

Investing in the stock market involves a degree of risk. Investors bear the risk that the value
of their investments may decline due to changes in market conditions or the performance of
the companies they invest in. By participating in the stock market, investors are essentially
transferring and sharing these risks.

Risk Diversification

At the same time, stock markets enable investors to diversify their portfolios risk by holding
shares in different companies across various industries, reducing the impact of poor
performance in any single investment.

Corporate Governance and Control

Owning shares of a company gives investors ownership rights, such as voting rights in
corporate decisions. This allows shareholders to have a say in major company decisions,
including the selection of board members, executive compensation, and strategic direction.
This aspect of the stock market helps ensure accountability and good corporate governance.

Benchmark for Performance

Stock market indices, such as S&P BSE Sensex, NSE Nifty, BSE 200, serve as benchmarks
for the overall performance of the market or specific sectors. These indices help investors
gauge how their portfolios are performing compared to the broader market.

Economic Indicator

The performance of the stock market is often considered a reflection of the overall health of
the economy. A rising stock market can indicate economic growth and investor confidence,
while a declining market may signal economic uncertainty or potential downturns.

Market Efficiency
Efficient stock markets incorporate available information into stock prices quickly and
accurately. This encourages companies to provide accurate and timely information to the
public, promoting transparency and market efficiency.

In all, stock markets play a multifaceted role in an economy, ranging from capital formation
and investment opportunities to economic indicators and risk management. The transactions
take place at the stock exchange and thus all these are also functions of stock exchanges.
Understanding these functions is crucial for investors and businesses alike. An informed
investor can make smart investment decisions by choosing to open a demat account and
participating in the market opportunities.

Conclusion
In essence, the stock market serves as a financial hub where investors, companies and the
economy converge. Its multifaceted functions encompass primary and secondary market
activities, price discovery, risk mitigation, and economic indicators. So, whether you're a
seasoned investor or just starting your journey, understand the functioning of the stock
market will help you tread carefully in your investment journey.
Functions of Stock Exchange

A stock exchange, securities exchange, or bourse is a facility where

stockbrokers and traders can
buy and sell securities, such as shares of stock and bonds and other
financial instruments. Stock
exchanges may also provide facilities for the issue and redemption of such
securities and
instruments and capital events including the payment of income and
dividends.Securities traded
on a stock exchange include stock issued by listed companies, unit trusts,
derivatives, pooled
investment products and bonds. Stock exchanges often function as
"continuous auction" markets
with buyers and sellers consummating transactions via open outcry at a
central location such as
the floor of the exchange or by using an electronic trading platform.
Functions of Stock Exchange
1. Economic Barometer:
A stock exchange is a reliable barometer to measure the economic
condition of a country.
Every major change in country and economy is reflected in the prices of
shares. The rise or fall
in the share prices indicates the boom or recession cycle of the economy.
Stock exchange is also
known as a pulse of economy or economic mirror which reflects the
economic conditions of a
country.
2. Pricing of Securities:
The stock market helps to value the securities on the basis of demand and
supply factors. The
securities of profitable and growth oriented companies are valued higher as
there is more demand
for such securities. The valuation of securities is useful for investors,
government and creditors.
The investors can know the value of their investment, the creditors can
value the
creditworthiness and government can impose taxes on value of securities.
3. Safety of Transactions:
In stock market only the listed securities are traded and stock exchange
authorities include the
companies names in the trade list only after verifying the soundness of
company. The companies
which are listed they also have to operate within the strict rules and
regulations. This ensures
safety of dealing through stock exchange.
4. Contributes to Economic Growth:
In stock exchange securities of various companies are bought and sold.
This process of
disinvestment and reinvestment helps to invest in most productive
investment proposal and this
leads to capital formation and economic growth.
5. Spreading of Equity Cult:
Stock exchange encourages people to invest in ownership securities by
regulating new issues,
better trading practices and by educating public about investment.
6. Providing Scope for Speculation:
To ensure liquidity and demand of supply of securities the stock exchange
permits healthy
speculation of securities.
7. Liquidity:
The main function of stock market is to provide ready market for sale and
purchase of securities.
The presence of stock exchange market gives assurance to investors that
their investment can be
converted into cash whenever they want. The investors can invest in long
term investment
projects without any hesitation, as because of stock exchange they can
convert long term
investment into short term and medium term.
8. Better Allocation of Capital:
The shares of profit making companies are quoted at higher prices and are
actively traded so
such companies can easily raise fresh capital from stock market. The
general public hesitates to
invest in securities of loss making companies. So stock exchange facilitates
allocation of
investor’s fund to profitable channels.
9. Promotes the Habits of Savings and Investment:
The stock market offers attractive opportunities of investment in various
securities. These
attractive opportunities encourage people to save more and invest in
securities of corporate
sector rather than investing in unproductive assets such as gold, silver, etc.
Types of Stock Exchanges
There are two types of stock exchanges in India.

1. Stock Exchanges at the National Level

2. Stock Exchanges at the Regional Level

1. Bombay Stock Exchange Limited (BSE)

Bombay Stock Exchange, popularly called BSE Limited, is the oldest stock exchange in Asia.
It was established in July 1875 and is the tenth oldest stock exchange globally.

BSE is the world’s eighth-largest stock exchange by market capitalisation of Rs 276.713

Lakh Crore as of January 2022.

BSE has 5,439 companies listed on it. Moreover, it was the first Indian stock exchange
recognised by the government on 31 August 1957 under the Securities Contracts Regulation
Act, 1956. BSE is one of the world’s fastest stock exchanges, with a speed of six
microseconds.

BSE developed the S&P BSE Sensex Index in 1986 to measure the stock market’s overall
performance. The BSE shifted from an open outcry system to an electronic trading system in
1995. BSE Online Trading or BOLT is an automated screen-based trading platform with a
capacity of 8 million orders per day.

2. National Stock Exchange of India (NSE)

The National Stock Exchange of India is a leading stock exchange in India. It was established
in 1992 as the first dematerialised stock exchange in India. SEBI, the capital markets
regulator, recognised NSE as a stock exchange in 1993.

NSE was ranked fourth for cash equities in terms of trades for the calendar year 2021. It was
the world’s largest derivatives exchange by the number of contracts traded in 2021. NSE has
a total market capitalisation of above US$3.4 trillion as of August 2021.

NSE’s flagship index is the NIFTY 50, launched in 1996. It is extensively used by Indian
investors in the stock market and serves as a barometer measuring the performance of the
Indian stock market.

3. Calcutta Stock Exchange Limited (CSE)

Calcutta Stock Exchange (CSE) is Asia’s oldest government-owned stock exchange. It was
reconstituted in May 1908 and is located at the Lyon’s range, Kolkata.

The Government of India granted permanent recognition to the Calcutta Stock Exchange
(CSE) on 14 April 1980 under the Securities Contracts Regulation Act, 1956. The Calcutta
Stock Exchange initially followed the open outcry system for stock trading up to 1997.
It was replaced by CSE Screen-Based Trading And Reporting or C-STAR, an electronic
trading platform. SEBI asked Calcutta Stock Exchange to stop operations, but the matter is
before the Calcutta High Court.

4. India International Exchange Ltd

India International Exchange Ltd (India INX) is a subsidiary of BSE and India’s first
international stock exchange. It is located at the International Financial Services Centre
(IFSC) in Gujarat (Gift City).

India International Exchange Ltd commenced operations on 16 January 2017. It runs on an

advanced technology platform and is the fastest exchange in the world, with a turnaround
time of four microseconds

India International Exchange Ltd operates 22 hours per day, six days a week. It helps NRIs
and International investors trade from anywhere globally across time zones. India
International Exchange Ltd has a daily turnover volume of Rs 74,509 crore.

5. Multi Commodity Exchange of India (MCX)

The Multi Commodity Exchange of India is the nation’s first listed commodity exchange. It
was established in November 2003 and was regulated by the Forward Markets Commission
(FMC). However, FMC merged with SEBI on 28 September 2015.

MCX is among the world’s top commodity exchanges based on the number of futures
contract trades. Moreover, MCX offers options trading in gold and futures trading in bullion,
non-ferrous metals, energy and agro-commodities.

6. National Commodities and Derivatives Exchange (NCDEX)

National Commodities and Derivatives Exchange (NCDEX) is India’s major agricultural

commodity index. It falls under the ownership of the Ministry of Finance and offers a
commodity exchange platform for trading in commodity derivatives.

NCDEX was established in April 2003, with headquarters in Mumbai. It obtained the
certificate for commencement of business in May 2003. NCDEX is a recognised stock
exchange under the Securities Contracts Regulation Act, 1956 and is regulated by SEBI.

7. Indian Commodity Exchange Limited (ICEX)

Indian Commodity Exchange Limited is a SEBI-registered commodity derivative exchange

headquartered in Mumbai. It was registered with SEBI in August 2017.

ICEX launched the world’s first diamond derivatives contract in August 2017. It offers a
trading platform for precious metals, spices, industrial metals, energy, agricultural products
etc.
Stock Market Index
What is a Stock Market Index?
A stock market index, also known as a stock index, measures a section of the stock market. In
other words, the index measures the change in the share prices of different companies.
The stock index is determined by calculating the prices of certain stocks (generally a
weighted average). It is a tool widely used by financial institutions and investors to compare
the return on specific investments and to describe the market.

Summary

 A stock market index measures a section of the stock exchange.

 It is determined by calculating the prices of certain stocks.
 Three of the most popular stock market indices in the USA are S&P 500, Dow
Jones Industrial Average (DJIA), and Nasdaq Composite.

Types of Stock Market Indices

Stock market indices may be classified in different ways. A “global” or “world” stock market
index, such as the MSCI World or the S&P Global 100, contains stocks from multiple
regions. Regions can be defined geographically (for example, Asia, Europe) or by levels of
income or industrialization (for example, frontier markets, developed markets).

A national index represents the performance of the stock market of a definite country and
reflects the sentiment of investors on the state of the economy. National indices include the
stocks of large companies listed on the nation’s largest stock exchanges. Many indices are
regional, e.g., the FTSE Developed Asia Pacific Index or the FTSE Developed Europe Index.

There are more specialized indices that track the performance of specific sectors of the stock
market. In the United States, specialized indices include the Morgan Stanley Biotech Index,
which consists of 36 American companies in the biotechnology industry, and the Wilshire US
REIT, which tracks more than 80 U.S. real estate investment trusts. There are other indices
that may monitor organizations of a certain size or type of management.

The Importance of Indices

The daily results of stock market indices are perhaps the most popular and significant
numbers in the whole world of investing and finance. Probably the world’s best-known and
most widely used stock market index, the Dow Jones Industrial Average (DJIA) consists of
30 largest traded companies in the United States.

Many investors use market indices for managing their investment portfolios and following
the financial markets. Indexes are deeply integrated into the investment management
business, and funds use them as benchmarks for performance comparisons.

Indices as Benchmarks

Indexes serve as benchmarks for different purposes in the financial markets. As mentioned,
the Dow Jones Industrial Average, Nasdaq Composite, and S&P 500 are the three most
popular U.S. indexes. The three indexes contain the 30 largest stocks in the U.S. by market
capitalization, all stocks on the Nasdaq Exchange, and the 500 largest stocks, respectively.
Benchmarks can be a good indicator of the overall U.S. stock market since they include some
of the most valuable U.S. stocks.
Investors can also use performance and benchmark values to follow investments by
segments. Some investors may diversify their investment portfolios based on the returns or
expected returns of certain segments. Furthermore, a specific index may act as a benchmark
for a mutual fund or a portfolio.

Trading Mechanisms
How the system works

Written by Tim Vipond

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What are Trading Mechanisms?

Trading mechanisms refer to the logistics behind trading assets and securities, regardless of
the type of market. These markets can be exchanges, dealers or OTC markets. The
mechanisms are the operations by which buyers of an asset are matched with sellers.

There are two main types of trading mechanisms:

 Order driven markets

 Quote driven markets

Trading Mechanisms: Quote Driven

In a quote driven market, continuous prices or “quotes” are provided to buyers and sellers.
These prices are provided by market makers, which mean these types of systems are better
suited for dealer or OTC markets. For a buyer, the price provided is the price a dealer is
willing to sell at. For a seller, the price provided is the price a dealer is willing to buy at.
Typically, the quoted buy price will be lower than the sell price. The spread is the profit that
the market maker, the dealer, makes.

Trading Mechanisms: Order Driven

In an order driven market, buyers and sellers of assets are able to place orders for assets they
wish to purchase or sell. They can list at market price, which executes a market order
instantaneously at the best available price. Alternatively, they can list a fixed/limit price,
which executes either a limit or stop order, not to be executed until certain pricing conditions
are met.
In an order driven market, counterparties are not necessarily available immediately,
depending on the listed price. Because this is so, order driven trading mechanisms are more
suited for exchanges. Orders will execute once a suitable counterparty is found for each buyer
or seller. In other words, a buy order will only execute if a seller is found who is willing to
sell at the specified limit price.

Order driven trading mechanisms are often supported by an order book.

Order Book

An order book is the system or database that operates behind an order driven trading
mechanism. The book lists all buyers and sellers, as well as their intended bid or ask prices.

In the above shown order book, we see sell orders listed in ascending order and buy orders
listed in descending order, sorted by list price. Orders in an order driven trading mechanism
execute when the lowest sell order and the highest buy order match, or exceed each other. In
the case of the Ethereum order book above (courtesy of CEX.io), no order will execute as the
lowest sell order price is higher than the highest buy order price.

Order books will typically continue updating as new orders are added in real-time.

Disadvantages of the Order Driven Market

As demonstrated by the order book above, the order driven style of trading mechanisms will
have lower liquidity than the quote driven market. In a quote driven market, a market maker
is always readily available to sell or buy, as long as the trader is willing to meet the slightly
higher premiums of quoted price. In an order driven market, trades can stagnate if buyers are
not willing to meet seller prices, or vice versa.

Because of this automated matching system, order driven market trading mechanisms are
most suitable for assets that are frequently traded and naturally very liquid. These markets
include stocks, options, bonds and some currencies, among others.

Trading Mechanisms: Order Types

In order driven trading mechanisms, there are several different order types that a trader can
take advantage of. These are briefly described above, but are further described in one of our
other articles.

The presence of the real-time order book allows traders to take advantage of limit and stop
pricing that will not fulfill until their conditions are met. This differs from market pricing,
which executes immediately, and may be unfavorable for traders.

Trading Mechanisms: Order Timing

Additionally, order driven trading mechanisms allow traders to specify the shelf life of a
specific order. Orders, for example, can be kept indefinitely until executed, set to last only a
day, or set to last until a specific time.

The Bottom Line

Knowing the different trading mechanisms is important know-how for traders. Understanding
the game allows the trader to play it better. Certain markets, for example, will use algorithms
in conjunction with order driven markets, and knowing this will allow a trader to make the
most out of their trades. As such, knowing the difference between the quote and order driven
trading mechanisms is definitely profitable information.

What is SEBI
SEBI stands for Securities and Exchange Board of India. It is a statutory regulatory body that
was established by the Government of India in 1992 for protecting the interests of investors
investing in securities along with regulating the securities market. SEBI also regulates how
the stock market and mutual funds function.
Objectives of SEBI
Following are some of the objectives of the SEBI:
1. Investor Protection: This is one of the most important objectives of setting up SEBI. It
involves protecting the interests of investors by providing guidance and ensuring that the
investment done is safe.
2. Preventing the fraudulent practices and malpractices which are related to trading and
regulation of the activities of the stock exchange
3. To develop a code of conduct for the financial intermediaries such as underwriters,
brokers, etc.
4. To maintain a balance between statutory regulations and self regulation.
Functions of SEBI
SEBI has the following functions
1. Protective Function
2. Regulatory Function
3. Development Function
The following functions will be discussed in detail
Protective Function: The protective function implies the role that SEBI plays in protecting
the investor interest and also that of other financial participants. The protective function
includes the following activities.
a. Prohibits insider trading: Insider trading is the act of buying or selling of the securities by
the insiders of a company, which includes the directors, employees and promoters. To
prevent such trading SEBI has barred the companies to purchase their own shares from the
secondary market.
b. Check price rigging: Price rigging is the act of causing unnatural fluctuations in the price
of securities by either increasing or decreasing the market price of the stocks that leads to
unexpected losses for the investors. SEBI maintains strict watch in order to prevent such
malpractices.
c. Promoting fair practices: SEBI promotes fair trade practice and works towards prohibiting
fraudulent activities related to trading of securities.
d. Financial education provider: SEBI educates the investors by conducting online and offline
sessions that provide information related to market insights and also on money management.
Regulatory Function: Regulatory functions involve establishment of rules and regulations
for the financial intermediaries along with corporates that helps in efficient management of
the market.
The following are some of the regulatory functions.
a. SEBI has defined the rules and regulations and formed guidelines and code of conduct that
should be followed by the corporates as well as the financial intermediaries.
b. Regulating the process of taking over of a company.
c. Conducting inquiries and audit of stock exchanges.
d. Regulates the working of stock brokers, merchant brokers.
Developmental Function: Developmental function refers to the steps taken by SEBI in order
to provide the investors with a knowledge of the trading and market function. The following
activities are included as part of developmental function.
1. Training of intermediaries who are a part of the security market.
2. Introduction of trading through electronic means or through the internet by the help of
registered stock brokers.
3. By making the underwriting an optional system in order to reduce cost of issue.
Purpose of SEBI
The purpose for which SEBI was setup was to provide an environment that paves the way for
mobilsation and allocation of resources.It provides practices, framework and infrastructure to
meet the growing demand.
It meets the needs of the following groups:
1. Issuer: For issuers, SEBI provides a marketplace that can utilised for raising funds.
2. Investors: It provides protection and supply of accurate information that is maintained on a
regular basis.
3. Intermediaries: It provides a competitive market for the intermediaries by arranging for
proper infrastructure.
Structure of SEBI
SEBI board comprises nine members. The Board consists of the following members.
1. One Chairman of the board who is appointed by the Central Government of India
2. One Board member who is appointed by the Central Bank, that is, the RBI
3. Two Board members who are hailing from the Union Ministry of Finance
4. Five Board members who are elected by the Central Government of India
This concludes the topic of SEBI- Objectives, Functions, Purpose and Structure, which is an
important topic for Commerce students.