Narnolia

Narnolia

Toll Free No: 1800-103-7212
HomeKnowledge Center

Knowledge Center

Origins of the Stock Market

3 mins490210
Origins of the Stock Market

Before we get into the origins of the stock market, let us first look at how the concept of a stock originated. The word stock is used to symbolize proportionate ownership in a company and these part owners are called stockholders or shareholders. While trading in debt and commodities is much older, the trading in stocks and the idea of stock markets originated only towards the end of the 16th century.

How global stock markets evolved over the years

The first documented issue of stocks was made by the Dutch East India Company. As businesses expanded, merchants required more capital to invest but there was a limit to what they could pool individually and thus the concept of joint stock was born. The Dutch East India Company established the Amsterdam Stock Exchange in the year 1602. From the shores of Europe, the idea of a stock exchange moved to the United States 175 years later.

London Stock Exchange was born in 1773 out of a coffee house. The first US stock exchange at Philadelphia was set up in 1790. Exactly 2 years later, twenty four supply brokers signed an agreement under a Buttonwood Tree, which came to be known as the Buttonwood Agreement in 1792. In March 1817, the group renamed itself as the New York Stock and Exchange (NYSE) board. That is where NYSE (Wall Street) has remained till date.

Stock markets in India - Origins of the Bombay Stock Exchange

The informal origins of the Bombay Stock Exchange date back to 1855 when 22 brokers gathered under a banyan tree to trade shares. In 1874 they formed themselves into the Native Share and Stock Brokers Association with one of the pioneers being Premchand Roychand. Interestingly, Roychand had made his profits trading cotton during the American Civil War and was the brain behind the Backbay Reclamation project. It was only in 1875 that the Native Share and Stock Brokers Association formally moved to Dalal Street. In 1957 the Native Share and Stock Brokers Association was formally recognized as an exchange by the government under the Securities Contract Regulation Act (SCRA) and has been known as the Bombay Stock Exchange ever since. It was only in 1995 that the BSE fully shifted out of the open outcry system of trading and replaced it with online trading. 

Regional stock exchanges and OTCEI

When the BSE was the default national exchange, there was a big room for regional exchanges like in Kolkata, Ahmadabad, Delhi, Chennai, Bengaluru, Pune and Hyderabad. These exchanges not only offered a platform for regional companies to list but also enabled arbitrage between exchanges due to price differentials. However, with the launch of online trading and internet trading, regional stock exchanges did not have much of a role to play and most of them could not afford the steep capital requirements. Along the way, India also experimented with the concept of Over the Counter Exchange of India (OTCEI) in 1990 on the lines of the NASDAQ of the US. The idea was to assist enterprising promoters to access the capital markets. In fact, OTCEI pioneered many novel concepts like screen based nation-wide trading, sponsorship of companies, bought out deals, market making and scrip less trading. While most of these became the norm in Indian markets, the OTCEI itself did not take off and is currently in the process of liquidation.

National Stock Exchange – How it globalized Indian markets

Commencing operations in 1994, the NSE went on to dominate the Indian capital markets over the next 25 years and still does so. Its focus on an all-India market network, major thrust on investor education, investor outreach programs, nurturing of the Nifty & sectoral indices as well as its first-mover advantage in derivatives helped the NSE establish a leadership position. Due to its technology comfort, NSE became the natural choice for global investors. Trading on the NSE Nifty is also available on the Singapore Exchange as SGX Nifty. NSE has also been on the forefront of direct market access (DMA), algorithmic trading and low latency trading in the last decade. While NSE and BSE are currently at par on most of the technology and operational issues, NSE continues to enjoy the advantages it has built on the derivatives front.

Other Stock Exchanges functional in India

After the SEBI enhanced its net worth requirements for stock exchanges, most of the regional exchanges decided to wind up. In case of the Magadh Stock Exchange, SEBI refused to grant them renewal. Apart from the NSE and the BSE, Calcutta Stocks Exchange (CSE) and the Metropolitan Stock Exchange (MSEI) are the two other functional stock exchanges. MSEI is a successor to the MCX Stock Exchange which was embroiled in the NSEL default controversy in 2013 and their equity volumes are very small at this point. There are also 2 exchanges at the IFSC (International Financial Services Centre) but they are yet to take off.

Summarizing big shifts in Indian capital markets

If we were to summarize the big changes in the Indian capital markets in the last 30 years, it would boil down to the following 8 big shifts:

Shift FromShift Towards
Open outcry system of tradingCompletely electronic trading system                 
Regional capital market systemNational level stock market
Physical securities trading and settlement                 Dematerialized trading of shares
Weekly settlement of tradesRolling Settlements on T+2
Hedging through Badla and ALBMHedging through futures and options
Retail driven marketInstitutional driven market
Entry barriers to equity investingZero entry barriers to equity investing                 
Opaque IPO market systemTotally transparent IPO system
Rate this article

Comments

Be the first to comment this article.

Directory

current IPO
  • --
Narnolia Research & Advisory Narnolia Trading Platforms Narnolia Online | media Room