Stock exchanges are the powerful platforms or marketplaces that allow us to invest or trade in securities. Most beginners in the stock market have a doubt regarding the exchange they should transact in— whether it should be BSE or NSE. In this article, we dive into the two prominent stock exchanges of India. We shall also analyse the factors that helped NSE become our country’s largest stock market exchange.
A Brief Profile on NSE and BSE
The Bombay Stock Exchange (BSE) was established way back in 1875. Located in Dalal Street, Mumbai, it is the oldest stock exchange in Asia. There are more than 5,400 companies listed on the BSE. Its benchmark index, the S&P BSE Sensex, is widely tracked by investors across the globe. The Sensex (Sensitive Index) tracks the performance of 30 of the largest and most actively traded stocks on the BSE. As of 2020, BSE is the 10th largest exchange in the world in terms of the cumulative market capitalisation of all companies listed on its platform.
The National Stock Exchange (NSE) was incorporated in 1992. It is also located in Mumbai. NSE is ranked the third-largest stock exchange globally in terms of the total number of trades in equity shares. There are more than 1,600 companies listed on the NSE. It is the first bourse in India to implement electronic or screen-based trading. The Nifty 50 is NSE’s benchmark index that represents the weighted average of 50 of the largest companies listed on its platform.
Both NSE and BSE provide a platform for companies to raise funds efficiently. The exchanges allow investors to trade in equities, currencies, debt instruments, derivatives (F&O), and mutual funds. Moreover, they provide services such as risk management, clearing and settlement, and investor education. The exchanges operate under the strict guidelines of the Securities and Exchange Board of India (SEBI).
Factors That Led to the Rise of NSE
For more than a century, BSE had complete dominance over stock trading in India. To break this monopoly and improve transparency in the capital market, our government decided to create the NSE. It was India’s first computer-driven stock exchange and was promoted by some of the leading financial institutions at that time. NSE was given the right to set up trading terminals across the country, while BSE was not allowed to do so. [Trading terminals are intermediary software that allows investors and traders to place buy/sell orders without having to call their brokers]. Meanwhile, it took a few years for BSE to receive permission for the same.
Thus, NSE was able to capture a significant portion of share trading across India. They used state-of-the-art technologies to ramp up the performance of trading systems. NSE was the pioneer of automated and paperless trading in the Indian market. It set up the first depository— the National Securities Depository Ltd (NSDL), which initiated the demat revolution in the country. NSE was also the first stock exchange to establish a clearing corporation (NSE Clearing Limited), which helps reduce trading and settlement risks in the market.
With the arrival of NSE, investing and trading in stock markets became highly transparent, efficient, and less costly.
Ever since NSE was established in 1992, there has been fierce competition between the two bourses for attracting more trading volumes. Higher volumes would ultimately allow exchanges to obtain more revenue. More importantly, it would lead to better liquidity, an aspect that is vital while trading in shares and derivatives. Higher liquidity allows traders to quickly and easily buy or sell shares at the exact price specified by them.
As a result of its revolutionary offerings, NSE has the highest average daily turnover for equity shares than any other stock market in India. The turnover for an exchange refers to the overall value of shares traded during a certain period.
Let’s look at an example. On July 12, 2021, around 15.76 lakh shares of Reliance Industries were traded on the BSE. At the same time, ~39.6 lakh shares of RIL were traded on the NSE— more than double! Since NSE has high trading volumes, the price a buyer offers per share (bid price) and the price the seller is willing to accept (ask price) will be fairly close to each other. This helps intraday and swing traders enter and exit a trade at the exact price specified by them and realise their targets.
Trading in Derivatives
For those who are not aware of what derivatives trading really is, here’s a quick explanation:
A derivative is an instrument whose value is derived from an underlying asset. The underlying can be a stock, commodity, index, etc. Derivatives are used by large institutions or traders to hedge risk and to speculate on price changes in the underlying asset. Futures and options (F&O) are the most common types of derivatives trading. An agreement (or contract) can be formed between a buyer and seller to buy/sell a predetermined quantity of the underlying asset at a specified price on a specified date. You can learn more about basic options terms here.
Coming back to the point, NSE has always been the most liquid exchange for derivatives. It is the undisputed leader when it comes to futures and options (F&O) trading. This is clear when you compare the volumes (options chain) of F&O activated stocks on NSE and BSE. In most instances, there are zero contracts formed in BSE. On the other hand, NSE’s Nifty 50 and Bank Nifty are traded heavily in the stock market.
Despite its exceptional growth, NSE lags behind BSE on one aspect: the brand. Sensex is still widely used across the world to measure the health of the Indian markets and the economy.
To summarise, NSE is the preferred exchange for intraday, swing, and derivatives trading due to high liquidity. If you are a long-term investor, it does not really matter where you buy/sell shares. However, BSE gives access to more than 5,000 stocks across various sectors. There could be a minor/insignificant difference in the prices of scrips in NSE and BSE. The costs related to investing and trading are similar for both exchanges.
Over the past few years, stock exchanges have come under the scanner due to frequent technical glitches. You may recall the four-hour-long halt in NSE’s trading system that occurred in February 2021. The exchange informed that the instability of telecom links from two of its service providers had affected the functioning of its risk management system. Unfortunately, it resulted in heavy losses for investors. There was a complete lack of accountability from NSE.
Recently, SEBI came out with a standard operating procedure (SOP) to curb technical glitches in stock market operations. NSE and BSE could face a penalty of up to Rs 2 crore or more if they fail to respond to technical disruptions within 30 minutes and restore operations within 45 minutes. Stock exchanges and other market infrastructure institutions (MIIs) will have to submit a root cause analysis report within 21 days of an accident.
Let us hope such events do not occur in the future!