Stock exchanges like the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) are the backbone of financial markets, enabling investors to buy and sell securities in a regulated environment. This guide explains their functioning in detail, covering:
- Introduction to Stock Exchanges
- Key Functions of NSE & BSE
- How Trading Works on Stock Exchanges
- Order Matching & Execution Process
- Clearing & Settlement Mechanism
- Regulatory Framework (SEBI’s Role)
- Indices: Nifty 50 & Sensex
- Technology Behind Stock Exchanges
- How Exchanges Make Money
- Differences Between NSE & BSE
- Recent Developments in Indian Stock Markets
1. Introduction to Stock Exchanges
A stock exchange is a marketplace where securities (stocks, bonds, ETFs, derivatives) are bought and sold. The two major stock exchanges in India are:
- Bombay Stock Exchange (BSE) – Established in 1875, Asia’s oldest stock exchange.
- National Stock Exchange (NSE) – Founded in 1992, India’s largest exchange by trading volume.
Both exchanges operate under SEBI (Securities and Exchange Board of India) regulations to ensure fair and transparent trading.
2. Key Functions of NSE & BSE
Stock exchanges perform several critical roles:
A. Facilitate Trading
- Provide a platform for buyers and sellers to trade securities.
- Enable electronic trading (earlier, trading was done via open outcry).
B. Price Discovery
- Stock prices are determined by supply and demand.
- Example: If more buyers want Reliance shares, the price rises.
C. Provide Liquidity
- Investors can quickly buy/sell shares without delays.
- High liquidity reduces price manipulation risks.
D. Ensure Transparency & Fair Pricing
- All trades are recorded and displayed publicly.
- Prevents insider trading and fraud.
E. Clearing & Settlement Guarantee
- Ensures that buyers receive shares and sellers receive money.
- Managed by clearing corporations (NSCCL for NSE, ICCL for BSE).
F. Market Surveillance
- Monitors unusual trading patterns to prevent fraud.
- SEBI and exchanges can suspend trading in suspicious cases.
3. How Trading Works on Stock Exchanges
Step 1: Company Listing
- Companies must meet listing requirements (minimum net worth, profitability, corporate governance).
- They file a Draft Red Herring Prospectus (DRHP) with SEBI.
Step 2: Investor Participation
- Investors need:
- Demat Account (to hold shares electronically).
- Trading Account (linked to a broker like Zerodha, ICICI Direct).
- Bank Account (for fund transfers).
Step 3: Placing Orders
- Investors place orders via brokers:
- Market Order – Buy/sell immediately at the best available price.
- Limit Order – Execute only at a specified price.
- Stop-Loss Order – Sell automatically if price falls below a set level.
Step 4: Order Matching
- The exchange’s electronic matching engine pairs buy & sell orders.
- Follows price-time priority:
- Best price orders get priority.
- If prices are equal, the earliest order executes first.
Step 5: Trade Confirmation
- Once matched, both parties receive a contract note.
- The trade is recorded in the exchange’s system.
4. Clearing & Settlement Process
After a trade is executed, the clearing house ensures:
A. Trade Validation
- Checks if the buyer has funds and the seller has shares.
B. Settlement Cycle (T+1 in India)
- Earlier, India followed T+2 (trade day + 2 days for settlement).
- Since 2023, T+1 (next-day settlement) is implemented.
- Example: If you buy shares on Monday, they’re credited to your Demat by Tuesday.
C. Role of Clearing Corporations
- NSCCL (NSE Clearing Corporation Ltd.) – Handles NSE trades.
- ICCL (Indian Clearing Corporation Ltd.) – Manages BSE trades.
D. Risk Management
- Margins are collected to prevent default risks.
- Circuit breakers halt trading during extreme volatility.
5. Regulatory Framework (SEBI’s Role)
The Securities and Exchange Board of India (SEBI) regulates stock exchanges to:
- Prevent insider trading and market manipulation.
- Ensure disclosure norms for listed companies.
- Protect retail investors from fraud.
- Monitor algorithmic & high-frequency trading (HFT).
6. Stock Market Indices: Nifty 50 & Sensex
| Index | Exchange | Composition | Purpose |
| Nifty 50 | NSE | Top 50 companies by market cap | Benchmark for Indian equity markets |
| Sensex | BSE | Top 30 companies | Oldest index, reflects market trends |
- Both indices use free-float market capitalization for calculation.
- Example: If Reliance (10% weight in Nifty) rises, Nifty goes up.
7. Technology Behind Stock Exchanges
- Electronic Trading (NEAT for NSE, BOLT for BSE) replaced open outcry.
- Algorithmic Trading (40-50% of trades) uses automated strategies.
- Co-location services allow high-frequency traders (HFTs) faster access.
8. How Exchanges Make Money
- Transaction Fees (Brokers pay per trade).
- Listing Fees (Companies pay to be listed).
- Data Selling (Market data to media & analysts).
- Membership Fees (Brokers pay for exchange access).
9. Differences Between NSE & BSE
| Feature | NSE | BSE |
| Established | 1992 | 1875 |
| Liquidity | Higher | Lower |
| Dominance | Derivatives & algo trading | SME listings |
| Technology | Fully electronic | Initially open outcry, now electronic |
10. Recent Developments
- T+1 Settlement (Faster than global markets).
- SEBI’s stricter IPO norms to protect investors.
- Rise of Retail Investors (Post-COVID surge in Demat accounts).
Final Thoughts
Stock exchanges like NSE & BSE ensure efficient, transparent, and regulated trading. Understanding their functioning helps investors make informed decisions.
Sekhar Gour is the creator of Finance Hub Assam. A finance enthusiast with a knack for simplifying complex money matters, Sekhar offers practical insights tailored to Assam’s economic scene. When not writing, he enjoys exploring local culture and market trends.