Stock Exchange: Meaning, Functions, History, Listing Requirements

Stock Exchange (also known as Stock Market, Securities Exchange, or Bourse) is a marketplace where traders and stockbrokers can buy and sell  shares (also known as securities, equities, or stocks) of the listed companies. Making monetary investment in various businesses is a popular method of profit making. Stock exchanges facilitate this process by making shares of companies available to the buyers. In absence of a stock exchange, a persons interested in making investment in a few companies might have to directly deal with all these companies. Making investment and booking profits in such a scenario would entail a lot of hassle both for the companies as well as the investors. A stock exchange makes this whole process simple and easier. Stock exchange acts like a market where one can buy stocks of their choice and sell them at a time deemed appropriate.

Note: Although, mostly, the terms stock exchange and stock market are used interchangeably — there is a slight difference between the two. Technically, a stock market will cover privately traded stocks as well. In contrast, a stock exchange is a place where stocks are traded publicly. However, for all practical purposes, stock exchange and stock market have the same meaning.

Brief History of Stock Exchanges

The Amsterdam Stock Exchange (now known as the Euronext Amsterdam) is the oldest stock exchange in the world. It was established in 1602 by the Dutch East India Company. Before that, the market was plainly a place where commodities were exchanged (i.e. bought and sold). Amsterdam Stock Exchange began trading of printed securities and thus beginning the era of modern stock markets.

The New York Stock Exchange (NYSE) began its journey on 17 May 1792, under a buttonwood tree in New York City. On that day, twenty-four stockbrokers signed the Buttonwood Agreement, agreeing to trade only five securities under that buttonwood tree. Cut to the present time, NYSE is the world’s largest stock exchange in terms of the market-cap of the listed companies (which was over USD 30 trillion in 2018.)

Bombay Stock Exchange (BSE) was started by Premchand Roychand in 1875. It all started when, in 1850s, five stock brokers came together under a banyan tree in front of Mumbai Town Hall, where Horniman Circle is now situated. Soon more stock brokers joined in and in 1875 these stock brokers established “The Native Share & Stock Brokers Association”. In 1930, the organization moved into its own building. The street where this building is located, came to be known as the Dalal Street (Broker Street). On 31 August 1957, the BSE became the first stock exchange to be recognized by the Indian Government under the Securities Contracts Regulation Act. In 1995, BSE switched to electronic trading — earlier it was an open floor outcry based stock exchange.

Modern Stock Exchanges

The the modern times, all major stock exchanges work electronically and investors can buy/sell stocks through the internet and mobile apps. As the history shows, earlier the stock exchanges were owned by the group of brokers who participated in the exchange. However, in the modern times most of the stock exchanges are owned by private companies (whose shares, sometimes, also trade at the exchange they own!).

Stock exchanges often create a group of trading companies called index. Every company in the index is allotted a weightage depending on its market-cap. The overall index value gets affected by the rise and fall of the prices of shares of the included companies. The indices values give strong indications about the overall trading direction at the exchange. Indices are also considered important indicators of the overall state of the economy.

Listing at the Stock Exchanges

It’s not that just about any company’s stock could be listed for trading in a stock exchange. All the stock exchanges around the world have their own minimum criteria for listing a company. Following are examples of such criteria:

1. New York Stock Exchange (NYSE):  Applicant company must have issued at least 1.1 million shares of stock worth USD 40 million and must have earned more than USD 10 million over the last three years.
2. NASDAQ Stock Exchange: Applicant company must have issued at least 1.25 million shares of stock worth at least USD 70 million and must have earned more than USD 11 million over the last three years.
3. London Stock Exchange (LSE): This exchange requires the applicant company to have a minimum market-cap of GBP 700,000, three years of audited financial statements, minimum public float of 25% and sufficient working capital for at least 12 months from the date of listing.
4. Bombay Stock Exchange (BSE): requires the applicant company to have a minimum market-cap of Rs. 250 million (USD 3.3 million) and minimum public float equivalent to Rs. 100 million (USD 1.3 million).

Functions of Stock Exchanges

Following are some of the primary functions of a stock exchange:

1. A stock exchange facilitates raising of funds for businesses
2. It helps in mobilizing savings for investments
3. Listing on a stock exchange generally improves corporate governance of a compअny
4. A stock exchange creates investment opportunities for small investors
5. Stock exchange acts as an important indicator of economy’s health
6. Stock exchange enables profit distribution