Stock Exchanges is a marketplace for stock. This marketplace is a virtual marketplace instead of a physical one, as trading takes place electronically. If such a marketplace did not exist, raising capital by issuing shares would have been challenging. Moreover, even if the company found new shareholders, it would have been difficult to trade their stakes. But due to the existence of the stock exchange, it becomes easier for people to sell their shares. The stock exchange, in short, works like an auction. The people who believe the firm performs well bid the price up, and those who think the firm would perform poorly bid the price down. Stock exchanges differ from other businesses.
In summary, there is a primary market where firms initially list their shares. Investors can use secondary markets to acquire and sell shares issued during the initial public offering (IPO). The functioning of national stock markets is used frequently to measure the condition of a country’s economy, or at the very least, trader enthusiasm for the country’s future.
Table of Contents
How The Indian Stock Exchanges Earn
Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) are private-run entities where India’s stock exchange takes place. Since the stock exchange provides various services such as providing investors and traders with a marketplace for trading their securities and allowing firms to raise capital by listing securities, such services provided by the BSE and NSE collect a small fee from the traders and firms. The exchange also earns revenue by laying down penalties on shareholders and companies.
The NSE is India’s leading stock exchange and is based on equity trading volume. It is the 4th largest globally. The stock exchange was set up in Mumbai and established in the year 1992. It was India’s first stock market to provide a trading system based on a screen. The NSE was founded to clarify the Indian market economy, and it has done so admirably. The NSE effectively provides services like trading, clearing, and debt and equity settlement to local and foreign investors with the assistance of the government.
BSE is far older than their relative, NSE. It was the first stock exchange set up in Asia in the year 1875. The BSE has a fascinating background. In the nineteenth century, a man named Premchand Roychand established the Native Share and Stock Brokers Association. It operated on Dalal Street, behind a banyan tree, where dealers would meet to purchase and sell stocks. The system gradually increased, and the exchange became known as the Bombay Stock Exchange. Currently, BSE is the world’s fastest exchange, with a trading speed of six microseconds.
The NSE is demutualized, but financial institutions and insurance service companies primarily own it. About 40% of BSE is held by brokers and investors, while banks own the rest. The NSE and BSE have 1,952 and 5,439 listings, respectively.
Both the NSE and the BSE have a comparable trading system. Investors and traders use their brokers to connect to the exchanges and place buy or sell orders. But the real question is to find the reason behind them deciding which strategy. You’ve probably heard the phrases’ Nifty’ and ‘Sensex.’ Both are indexes, with the former reflecting the NSE and the latter the BSE. These indices are critical to the operation of these exchanges. Both are indexes, with the former reflecting the NSE and the latter the BSE. The indices serve as a barometer of the condition of the equities traded on this exchange. A group of 50 NSE companies and 30 BSE stocks have been chosen based on their company’s repute, market size, and relevance to be part of a weighted formula that provides us with the index’s “worth.” If the prices of any of these stocks rise, the value of the Nifty and Sensex rises. If prices fall, so will the Nifty and Sensex.
The revenue model of the stock exchange is quite diverse and complex. First, they earn revenue from transaction charges that take place on their virtual platform. Next, stock exchanges charge for the data provided, that is, the live charts displayed to their customers. Apart from providing services like to aid in buying and selling stocks, they offer training facilities and technical courses which also helps to their revenue.
How Foreign Stock Exchanges Earn
Any entrepreneur’s ultimate dream is to have their companies and startups listed in stock exchanges like the National Association of Securities Dealers Automated Quotations (Nasdaq), Financial Times Stock Exchange (FTSE) & Nikkei. Nasdaq has assisted computer behemoths Apple, Microsoft, and Intel in becoming what they are today. After all, these firms used Nasdaq in its early days to acquire much-needed cash in a timely way, allowing them to become billion-dollar corporations. Next, FTSE is the London Stock Exchange stock index, which gives companies great exposure to raise capital. Few of the recognized companies listed under FTSE, such as Barclays, Rolls-Royce Holdings. Lastly, Nikkei is a stock market index for Tokyo Stock Exchange. It is the third-largest stock exchange market and has set a benchmark index comprised 225 Japanese corporate giants such as Honda, Toyota, Suzuki, Sony, Mitsubishi, and others.
Listing and investing in such stock exchanges include multiple benefits as these stock exchanges attract premier companies across the globe. Since it attracts high-growth businesses, its equities are more volatile than those on other exchanges. If we trace the history of such stock exchanges, then it shows a record of groundbreaking accomplishments.
Although all three of them are one of the most prestigious stock exchanges globally, people always prefer Nasdaq because, given the cost reductions, many firms regard listing on the NASDAQ as a reasonable alternative. To date, firms listed on the NASDAQ are perceived to be more growth-oriented, which means higher volatility and tremendous upside potential. It is said to be a champion of growth and prosperity.
The Stock Exchange Business Model
Throughout this article, you would have observed phrases and words such as “services” for buying and selling shares. But do you know, these facilities come with a price? Yes, the customers who invest in the stock market pay a decent amount of money to access these facilities.
- Registration & Regulation Fee Revenue: For stockbrokers, investors, or anyone willing to participate in the stock market activities need to register and pay the registration and regulatory fee for their membership at the stock market. They also charge for facilitating trading licenses. All of these fees include the one-time registration cost and are billed annually.
- Transaction Charges: The stock exchanges charge these market participants in a variety of ways. The trading parties pay a transaction charge for each trade that takes place on the stock exchange platform. All trading is conducted through regulated market players such as brokerage firms, trading houses, and asset management organizations. The BSE charges about 0.00275% for every transaction, and NSE charges 0.00325%.
- Listing Fee Revenue: To feature in the stock exchange to raise capital, they need to pay a listing and trading fee to the stock market. Equities remain the most common securities listed. The initial one-time listing fee is typically calculated depending on the total number of shares listed via the issuance. Following that, stock exchanges impose prices based on company actions such as the issuance of extra shares via a rights issue, bonus issue. This sector accounted for nineteen per cent of Nasdaq’s total revenue in 2019.
- Information & Technology Services: Since the marketplace is virtual, it is evident that stock exchanges offer excellent information and technology services. As such, businesses require faster data and faster trade execution through dedicated products and services. As market data is needed for all stock market players’ research, trading, and investment operations, stock exchanges earn revenue heavily through this model.
- Data Fee Revenue: Data sources provided by stock exchanges account for a significant percentage of the stock exchange’s revenue profits. Historical data is required for research and analysis, real-time information is required for currency trading and investing operations, summary data is necessary for reporting and auditing, and reference data is required for security-specific features.
- Subsidiary Companies: Other than selling data and charging fees to brokers and investors, stock exchanges usually have subsidiary companies under their name to earn revenue. These companies provide training and information regarding finances and the stock market. Other than that, these companies also charge by storing your depositary shares in electronic format.
The Future of Stock Exchanges
The Global View
Stock exchanges have expanded considerably over the last three decades in developed and developing countries. The privatization of state-owned enterprises, increased macro stability and policy changes are factors that have contributed to rapid growth. But since the COVID-19, the stock markets have crashed badly. The COVID-19 has been reshaping the face of stock exchanges across the globe. In the last twenty years, the development of stock markets has been relatively linear and thus formulaic: they have demutualized or privatization and then consolidated, most recently in horizontal sector mergers that have proceeded uninterrupted even last year. Such as when Euro Next acquired the Borsa Italiana Group from London Stock Exchange to create the leading pan-European market infrastructure. However, the exchange industry’s linear development track is being disrupted by several distinct developments with lengthy implications for the economy and the future of global capital markets. In the post-pandemic era, the established hegemony of the American NASDAQ and the New York Stock Exchange (NYSE) is traditionally in intense conflict with the London Stock Exchange and a few other significant exchange groupings facing an extremely unclear future.
It would be a sin to blame the COVID-19 for disrupting the trajectory of stock exchanges, as other culprits have also contributed to disturbing the stock market linear path. Brexit has placed doubt on the London stock exchange prospects as a premier listing and investment destination. The exchange moved quickly, introducing changes to its listing regulations to attract the prospective listing of Saudi Aramco, the Saudi oil company, to enable businesses with the dual-class shares to be listed in its Premium category, which prompted investor uproar. If we discuss the tensions in the American continent, the Trump presidency has spilt over into the capital market arena, forcing three big Chinese issuers to delist from the NYSE. A second, the directive requires dual-listed firms to provide the American Public Company Accounting Oversight Board (PCAOB) access to their audit files, a step opposed by the Chinese government. If implemented, many more Chinese businesses might be delisted from US marketplaces in the next few years. If these different patterns are projected into the future, it appears that the predominance of NYSE and LSE is far from assured in the long run. Like NASDAQ and Euronext, many stock exchanges realized the limitations of their historical model as listing and trading venues a long time ago and have evolved into technology businesses, delivering assistance to their issuer and various emerging and developing markets.
The Indian Perspective
Traders believe India’s performance market surge will continue, spurred by prospects of sustained dovish fiscal policy even as inflation worries grow. In 2020, India’s stock markets experienced significant volatility. Few could have anticipated that Indian stocks would rocket to all-time highs by the end of the year in March when the needs saw their worst-ever sell-off. While the Economic growth in the Indian market has entered a deep recession and the prospects for the current fiscal year is gloomy, stocks are surging at breakneck speed. The strict lockdown in India, which badly harmed the economy, seemed to be a fading memory for some traders, but the following year might be challenging. Although there is a positive approach because the BSE and NSE are scaling a new height that has led to a remarkable recovery in the Indian stock market history, but comparing India to a global level, it is far behind its competitors. But, there can be a light of hope that India’s stock markets are unlikely to soar in 2021 as Indian stocks were already very overpriced before the introduction of the pandemic. Since the recovery from a pandemic, India’s stock market is very costly currently. For example, Nifty’s valuations are currently trading above its 5-year average. While these reasons keep traders excited, business fundamentals must evolve to catch pace with their rising valuation.
Experts state that “The country’s economic supply side, such as manufacturing and trade, has perked up, but demand remains weak. Indian families are still struggling from job losses and wage cutbacks. If market confidence stays low, it will have a negative influence on company sales and profits, putting a halt to the stock’s surge.” Another thing to consider is that “Intermittent corrections cannot be ruled out because of the second wave pandemic, and hence India must sustain economic recovery.” The advice by experts should be considered because India is currently one of the worst-performing in the stock market compared to other stock markets across the globe.
China has gained relevance as an exception. Not only does it appear to have rebounded from the effects of the pandemic, but it is also showcasing substantial progress. Moreover, despite a strong start in 2021, many analysts anticipate the Chinese economy expanding even quicker in 2022. Experts also expect European markets to rebound significantly after losing the rise in 2020. “After Brexit is resolved and vaccinations are deployed, European markets may perform better in the future. After failing in 2020, emerging market indexes may also rise.”
Meanwhile, the Indian stock exchange might face a more difficult journey. High market values, combined with a sluggish economic recovery, may put a damper on traders newfound optimism.