The oldest stock exchange in Asia as well as India, Bombay Stock Exchange is situated at Dalal Street, Mumbai. Established in 1875, BSE has the 10th biggest capitalization value, measured at over $2.2 trillion in April 2018.
History of BSE
The BSE started under a banyan tree where 22 stockbrokers used to meet in front of the town hall in Mumbai. However, the location of their meetings changed several times to incorporate a higher number of brokers. In 1874, the group of members moved to Dalal Street giving birth to the organization that earned the name of ‘The Native Share and Stock Brokers Association’ in 1875.
BSE became the first exchange that the Indian government recognized on 31 August 1957 under the Securities Contracts Regulations Act similar to NSE. The exchange had another relocation to the Phiroze Jeejeebhoy Towers in 1980. Six years later, S&P BSE Sensex index came into being, giving it a tool to measure the overall performance. On top of this index, BSE started trading futures contracts using SENSEX to gain entry into the derivative market in 2000. Another expansion came in the consequent years with equity derivatives and SENSEX Options added to its range of products.
Then technology played its part and allowed BSE to forgo the traditional open outcry trading model. The exchange upgraded to BOLT (BSE Online Trading), the screen-based and automated trading platform, developed in 1995 by CMC Ltd. The digital platform added capacity of 8 million daily orders. In September 2012, it partnered with the United Nations Sustainable Stock Exchange followed by the launch of India’s first international exchange (INX) in 2016.
The benchmark index, Sensex, is a free-floating index of market-weight that tracks the top 30 companies’ performance. Share market of Bombay Stock Exchange puts Sensex to use of tracking the performance of listed companies to find how India’s capital market would move. Though this depends on how the share prices of those 30 companies move individually. Besides the benchmark, BSE also provides sectorial indices including:
- S&P BSE auto
- S&P BSE consumer durables
- S&P BSE bankex
- S&P BSE rapid moving consuming goods
- S&P BSE capital goods
How SENSEX is Calculated?
Free float is the method for calculating SENSEX level, a direct indication of how those 30 stocks are performing, since 1 September 2003. This method evaluates readily tradable part of shares while excluding the locked-in shares and others held by promoters and various shareholders.
The process starts by taking market capitalization (the price of stock * number of shares issued) into account. Then, a free-float factor is determined that is a multiple of the company’s market capitalization and takes into account the details the organization has submitted. Finally, keeping the base index at 100, Sensex’s value is calculated through ratio and proportion.
Investment Methods of BSE
There are both direct and indirect methods available to trade a BSE-listed company’s securities. Though the choice of method depends upon the transaction value. However, only registered institutional investors and brokerage agencies can do the primary trading through bulk transactions in the Bombay Stock Exchange. On the other side, retail customers don’t have access to the scheme of direct investment. These can make transactions via stock investing platforms or certified stockbrokers. It is called a secondary trading mechanism, and FINRA (Financial Industry Regulatory Authority) regulates it. To make these financial transactions and become a stock’s virtual owner, a person needs a Demat account.
BSE Investment Segments or Instruments
All the organizations listed on BSE collect funds through the exchange using one (or more) of the instruments discussed below:
The major component of equity instruments is filled with shares that organizations issue to collect ample paid-up capital required to run their operations smoothly. IPO (Initial Public Offering) is an opportunity for every business to raise massive equity, generally used by start-up companies. However, prices become volatile after a stock starts trading and SEBI regulates how new shares are issued at this moment. Though retail investors can trade already issued stocks through the second mechanism that involves a stockbroker.
Government Securities and Debt Instruments
If a company doesn’t want to give ownership to investors while raising finances, these tools come to use. Risk-free trading is allowed in debt instruments in both primary as well as secondary markets. Several government securities like floating rate bonds, dated securities, zero-coupon bonds, and capital index bonds are traded under the BSE.
Benefits of BSE
Many investors and traders prefer investing in the Bombay Stock Exchange because of the following benefits:
Under mandates from SEBI bringing various rules and regulations to the table, BSE works to prevent the chances of illicit activities. This helps keep a watch on the registered companies and their actions while minimizing losses to investors. Thus, traders can easily bypass any fraudulent organization if they invest in companies listed under BSE.
BSE regulates the trading price of every security listed through the stocks’ supply and demand prevailing at the moment. And, by showing a share’s actual value, it affects the market capitalization of a company and the ease of procuring funds.
Well-timed Display of Information
When registered under BSE, all the organizations need to publish the required information about their reinvestment pattern as well as revenue generation. Further, SEBI regulates the display of transfer and bonus issue, overall dividend disbursed, booking, and closure facility, etc.
A company can use securities issued as a collateral guarantee when availing a loan as many financial institutions give away funds taking BSE-listed equity as leverage.
Simple Capital Generation
Investors trust every company having a BSE listing while budding businesses gain immediate market exposure. This allows investors to carefully examine a company’s condition before investing. In short, a business can easily raise paid-up capital with a listing under the country’s prevalent stock exchange.
Besides, one can readily sell BSE-listed securities in the financial market, fulfilling the liquidity requirements of individual investors and businesses. A company can easily obtain funds by issuing equity and debt securities and attracting investors to generate wealth.
BSE is India’s oldest stock exchange and has been around for almost 150 years. It has been able to withstand many different regimes and technological revolutions to become the backbone of India’s economy. It can be fair to say that without this stock exchange our economy would not be as developed as it is now.
In short, BSE is a vital part of India’s financial market regulation. In an economy, market fluctuations can be observed by analyzing the benchmark index’s performance.