Meaning and Definition of a Stock Exchange

A joint stock company raises long-term finance by issuing shares and debentures to the public (studied in the earlier chapters on Issue of Shares, Issue of Debentures and the Financial Market). Once those securities are in the hands of investors, a fresh problem arises: an investor who bought shares may later need cash, retire, or simply wish to switch into a different company's shares. Because the company itself does not buy back what it issued, investors need an organised place where existing (already-issued) securities can be bought and sold among themselves. That organised place is the stock exchange, and understanding how it works is the focus of this chapter — the last in the Maharashtra HSC (MSBSHSE) Std XII Secretarial Practice syllabus.

Meaning. A stock exchange is an organised market where existing (already-issued) securities — equity shares, preference shares, debentures, bonds and government securities — are bought and sold under a recognised set of rules, bye-laws and regulations. It does not deal in new securities being issued for the first time; that job belongs to the primary market (also called the new-issue market). The stock exchange itself constitutes the secondary market — the market for securities that have already completed their first (primary) sale. This distinction is examined more closely later in the chapter, because students very often confuse the two.

Legal definition. Under Section 2(j) of the Securities Contracts (Regulation) Act, 1956 — the central statute that governs the working of stock exchanges in India — a stock exchange is defined as "any body of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities." Every recognised stock exchange in India functions under a licence (recognition) granted under this Act, and today under the continuing regulatory oversight of the Securities and Exchange Board of India (SEBI), the capital-market regulator discussed later in this chapter.

Why it matters. A stock exchange gives a security liquidity — the ability to be converted into cash quickly, at a fair, publicly known price — and marketability. Without such a market, investors would be reluctant to subscribe to new share and debenture issues in the first place, because they would have no easy way to exit their investment later. In this sense the secondary market (the stock exchange) and the primary market are two halves of the same system: the primary market lets companies raise fresh capital, and the stock exchange makes investors willing to supply that capital by promising them an exit route.