Features of a Stock Exchange

A stock exchange is not just any marketplace — it has a distinct set of characteristics that separate it from an ordinary market for goods.

1. An organised and regulated market. Trading takes place only under the rules, bye-laws and regulations framed by the stock exchange itself and under the overarching regulatory framework of SEBI and the Securities Contracts (Regulation) Act, 1956. Nothing is left to informal, unregulated bargaining.

2. Deals only in second-hand (already-issued) securities. As explained above, a stock exchange is a market for securities that already exist and have already had their first sale. It is a market for 'used' securities, in the same sense that a second-hand car market is a market for cars that have already had one owner.

3. Membership-based trading. Historically, only registered members (brokers) of a stock exchange could transact business on its trading floor; today an investor still buys and sells only through a SEBI-registered stockbroker/trading member, even though trading itself is fully electronic (see the Trading Mechanism section below).

4. Provides liquidity and marketability. Because buyers and sellers from all over the country meet on a single electronic platform, an investor can convert a security into cash — or cash into a security — almost instantly, at a transparent, continuously-updated market price.

5. Price is determined by demand and supply. The price of every security fluctuates continuously according to the forces of demand and supply among thousands of buyers and sellers, not by any single party's decision. This is what makes the stock exchange an efficient barometer of a company's — and the economy's — performance.

6. A barometer of the economy. Because share prices reflect investors' collective judgement about companies' future earnings, movements in stock-exchange indices are widely read as a leading indicator of the health of the wider economy. …