What is BSE?
The Bombay Stock Exchange is the first and oldest stock exchange in India which was founded in 1875 as the Naive Share and Stock Brokers Association. The BSE is located in Mumbai, India, and lists more than 5000 companies with a total market capitalization of $3.5 trillion. Also, BSE is one of the largest stock exchanges in the world, along with NYSE, NASDAQ, LSE, and SSE.
The Bombay Stock Exchange played a vital role in the development of India’s capital market, including the retail debt market, and providing the Indian corporate sector with an efficient platform to raise investment capital. Also, it is popular for its electronic trading system that provides fast and efficient trade execution. Investors can trade in equities, currencies, debt instruments, derivatives, and mutual funds on this stock exchange. Additionally, it provides other services like risk management, clearing, settlement, and investor education.
Functions of BSE
The following are the primary functions of the Bombay Stock Exchange –
- Price Determination: The prices of securities in the secondary market depend on the securities’ demand and supply. Thus, BSE helps in this process by constantly valuing all the listed securities. And investors can easily track the prices of these securities through the index popularly known as SENSEX.
- Contribution to the Economy: BSE offers a trading platform for securities of various companies. The trading process involves continuous reinvestment and disinvestment. This gives an opportunity for capital formation, funds movement and boosting of the economy.
- Facilitates Liquidity: The most important function of BSE is ensuring a ready platform for the sale and purchase of securities. This gives investors the confidence to convert the existing securities into cash anytime. Thus, investors can buy and sell anytime offering them high liquidity.
- Transactional Safety: BSE ensures that the securities are listed after verifying the company’s position. Also, all listed companies must adhere to the rules and regulations laid out by the governing body, i.e. Securities and Exchange Board of India (SEBI).
How Does BSE Work?
The Bombay Stock Exchange uses the electronic trading platform to conduct its financial transactions. Through direct market access, investors can directly place market orders in BSE online without the need for external specialists. Later, the focus shifted from buyers/sellers to the total value of transactions in a day due to the lack of limit orders.
Investors can trade on the BSE stock exchange through any brokerage firm against a fee. However, certain professional investors can apply for direct investment access who make large transactions on the BSE stock market. Also, the stock exchange uses BOLT – Bombay Online Trading Platform for efficient trading.
Transactions on the BSE platform require T+2 rolling days for settlement, which means that all transactions take two days to process. Moreover, the SEBI is responsible for regulating the stock exchanges in India and constantly updating rules to ensure smooth operation.
Advantages of Listing with BSE
There are several advantages that a company can enjoy by listing with BSE –
- Easy Generation of Capital: The companies listed on the stock exchange build confidence among all investors. Also, it spreads market knowledge about business, allowing investors to properly assess the company’s future prospects and invest accordingly. A company can raise the paid-up capital effectively only if it is there on the country’s major stock exchange. Additionally, securities listed on the BSE can easily be bought and sold in the financial market, thereby providing sufficient liquidity to both businesses and investors. The companies can raise funds for any business requirement by issuing equity or debt security which investors purchase for the purpose of wealth creation. Investors can also sell their securities using the BSE’s electronic trading settlement, allowing investors to encash their investment as and when the need arises.
- Legal Supervision: If the investors choose to invest in companies listed on BSE, they can skim through the fraudulent companies. Also, SEBI governs several rules and regulations to monitor the operations of these listed companies. Thus, it minimizes the chances of investors losing money due to the company’s illegal activity.
- Publishing Adequate Information: The companies on the Bombay Stock Exchange must report adequate information about total revenue generation and reinvestment patterns on an annual basis. As per SEBI regulations, companies must also report total dividends, bonus and transfer issues, and the book-to-closure facility.
- Pricing Rules: The current supply and demand determine the pricing of securities trading in the BSE stock market. This price reflects the real value of the share, which affects the company’s market capitalisation and ease of procurement of funds. While availing of loans, the company’s security serves as a collateral guarantee. Also, most financial institutions accept equity shares listed on BSE as collateral for obtaining funds.
Investment and Trading Segments
The securities listed on the Bombay Stock Exchange can be traded directly or indirectly, depending on the volume of transactions. Primarily bulk transactions on BSE are only possible through registered brokerage agencies and institutional investors. On the other hand, retail investors can make transactions through certified stock brokers, broking firms, or any stock investing platform. Thus, Financial Industry Regulatory Authority (FINRA) regulates secondary trading in India. Investors must open a demat account for the financial transactions under this mechanism.
Major Investment Segments
To raise funds for the business, all companies under the BSE can employ the following financial instruments –
- Equity: The most common equity instruments are the shares issued by the company to raise adequate paid-up capital for its smooth business operations. During the initial public offering in the primary market, a massive amount of equity is raised. However, the issuance of new shares is subject to strict SEBI regulations because of volatility in stock prices at this stage. Later, the equity previously raised is traded among retail investors in the secondary market through a stockbroker.
- Debt instruments: The underlying company issues these securities to raise funds without giving ownership to the investors. These securities are relatively risk-free in nature. Also, investors can trade them in both primary and secondary markets, depending on the type of instrument.
- Government securities: Common government securities that trade on BSE are zero coupon bonds, floating rate bonds, capital-indexed bonds and dated securities.
Major Indices in BSE
The primary index of the Bombay Stock Exchange is Sensex. It is a free float market-weighted index that tracks the performance of the top 30 companies in India. Therefore, the BSE share market uses Sensex to track the performance of these companies to determine whether the Indian capital market will fall or rise depending on the stock price movement.
Apart from the benchmark index, BSE offers other sectoral indices. Some of them are –
- S&P BSE Auto
- S&P BSE Bankex
- S&P BSE Capital Goods
- S&P BSE Consumer Durables
- S&P BSE Fast Moving Consumer Goods
Additionally, BSE has established indices that divide companies into small and mid-cap based on their market capitalization. They are known as the BSE small-cap index and BSE midcap index. Moreover, index mutual funds that seek to profit from the capital appreciation of these companies can monitor these indices.
Frequently Asked Questions
The Securities and Exchange Board of India (SEBI) is the regulatory authority for BSE and also the principal regulator for all stock exchanges in India.
Any trade in securities on BSE is settled through ICCL on a T+2 basis. A T+2 cycle means that the transactions are done on the trading day (T day), and the final settlement takes place on the second business day (excluding Saturday, Sunday and other settlement holidays) after the trading day.
The total number of companies listed on the Bombay Stock Exchange is 5291 (as of 30th October).
Learn: Common Stocks