Stock Exchange: Meaning, Functions & Examples for Class 12

A stock exchange is an organized platform where traders—both buyers and sellers—come together to transact in financial instruments such as stocks, bonds, and commodities. In the context of the Indian financial system, the stock exchange is regulated by a government authority called the Securities and Exchange Board of India (SEBI), which enforces strict regulations to protect investor interests and encourage market discipline.

The primary function of a stock exchange is to facilitate the buying and selling of financial assets in a secure, fair, and transparent manner. Only companies that are officially listed on a recognized stock exchange can have their shares traded on it. These trades occur during predefined business hours and are conducted under a set of well-established market rules.

For example, if a company wants to raise funds, it can list its shares on a stock exchange, allowing the public to buy them. In return, investors receive partial ownership in the company and can sell their shares anytime on the same platform, ensuring high liquidity.

Stocks that do not qualify for a formal listing can be traded over the counter (OTC), but these are generally seen as less credible than those listed on a reputed exchange. OTC shares do not benefit from the same level of regulatory scrutiny or investor trust as those traded on organized stock exchanges.

How Stock Exchanges Work

In India, stock exchanges operate through an order-driven electronic system. All buy and sell orders are placed electronically and automatically matched using a trading computer. This approach removes the need for any market ‘specialists’ or intermediaries, resulting in greater transparency and efficiency.

Brokers play a crucial role in this ecosystem. Investors can place their trade orders only through authorized brokers, who transmit these to the exchange. Both large institutions and retail investors can benefit from direct market access, executing their trades swiftly and directly through broker-provided terminals.

One of the significant advantages of an order-driven exchange is that all pending orders are displayed publicly, fostering transparency, fair price discovery, and increased trust among market participants.

Benefits of Being Listed on a Stock Exchange

Listing shares on a recognized stock exchange offers several benefits:

• Only listed shares are quoted and actively traded on the exchange.
• Listed companies gain higher market visibility and reputation, attracting more shareholders and improving their credibility.
• Raising capital is easier and more economical as companies can issue shares directly to the public.
• Listed securities are widely accepted as collateral, simplifying access to credit for businesses.
• Investors in listed shares enjoy better liquidity and can estimate the market value of their investments in real-time.
• The price of listed securities reflects real market demand and supply, ensuring fair and transparent valuation.

Major Stock Exchanges in India

Step-by-Step: How a Stock Trade Happens

Key Principles and Formulas

• All trades are governed by SEBI’s regulations, securing fairness and protecting investors.
• Price of shares is set by market forces—demand and supply—on the exchange.
• Market Capitalization Formula: Share Price × Number of Shares Issued

Application Example

Suppose ABC Ltd. lists its shares on BSE. If investors expect strong growth, demand rises and so does the share price, reflecting in the SENSEX. Investors can sell these shares any day, making it liquid and easy to convert into cash.

Integration and Importance in the Indian Economy

Stock exchanges are deeply integrated with the financial sector and significantly influence economic growth. Strong performance in one major exchange, such as BSE, can have ripple effects across global markets. These platforms help channel resources to businesses, foster credibility, and drive innovation by making capital more accessible.

Practice Questions

• Explain the role of a stock exchange in ensuring liquidity for investors.
• What are two major differences between a listed and an over-the-counter share?
• How does SEBI protect investor interests in the Indian stock market?

Next Steps and Vedantu Resources

• Explore more Commerce concepts through comprehensive notes and practice sheets.
• Test your understanding with topic-based quiz modules and sample papers.
• Access detailed chapter summaries and live sessions with expert Commerce teachers.

A well-functioning stock exchange plays a vital role in building a robust financial ecosystem. For deeper study and expert-led learning, continue exploring structured Commerce resources and interactive learning solutions.