Stock Market and Stock Exchange: Understand the Difference

21 Oct 2020  Read 452 Views

"Financial literacy is just as important in life as any other basics". 
One of the major problems with today's generation and the economy is the lack of financial literacy. People often come across words like stock, shares, NSE, BSE, share market, stock market, stock exchange, etc. But there are only some who know the precise meaning of any of these terms.

However, the time seems to be changing every day with people having more desires to fulfill, thus creating an increased need for more money. Warren Buffett says, "Never depend on a single income. Make investment to create a second source".

Hence, people often search for alternative sources of income as well. This is the reason why more individuals have now started scanning more about topics relating to investments and the stock market.

The initial research often includes learning about stocks and shares. Are you clear on what they mean, though? If not, click on this link to understand what stocks and shares mean.

After understanding what stocks and shares are, the questions that often surface the most are, 'What Is Stock Market and Stock Exchange? What's the difference between the two? How does the stock market work?'

So, let us get into the basics.

What is the Stock Market?

Stock Market refers to the assemblage of buyers and sellers who sell or purchase or trade-in stocks. It could be defined as the infrastructure that promotes the buying and selling of shares or stocks.

The Stock market is a broader term in comparison to the stock exchange. It refers to all those companies that list their shares on a public platform so that public investors can buy it. It includes both primary and secondary markets and is also a combination of OTC (over-the-counter) trading, electronic trading, and stock exchanges.

The stock market could be defined as the platform where trading of shares takes place, facilitating companies to invite capital from the public so that they could fund their expansion plans.

Depending upon the sentiments of the people who participate in investing, these stock markets could also be classified as bullish or bearish markets. Now the question arises, What are bull and bear markets?

Well, Bull markets are those where the buyers are planning or looking to buy shares in expectations of future profits. On the other hand, a bear market is the one where the investors are trying to sell out their holdings as they are expecting a loss in the future.

What is the Stock Exchange?

Stock Exchange refers to the formal organizations that allow companies to list their shares and also allow them to offer them for sale to the public. In simpler words, they are the entities that facilitate trading in shares.

Stock exchanges facilitate trading by laying down the conditions for listing, delivering services to individuals, brokers, and traders, and keeping track of trade volumes and price fluctuations. Therefore, stock exchanges are the platform, physical or virtual, on which the buyers and sellers meet.

In India, most of the share trading happens on two major stock exchanges. These are- the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).

The BSE was the first stock exchange not only in India but also in the first established stock exchange in Asia. It is among the fastest stock exchanges in the world.

Another Indian stock exchange, NSE, was established in 1992. It is the first stock exchange in India which is a demutualized electronic exchange.

Difference between Stock Market and Stock Exchange

Basis

Stock Market 

Stock Exchange

System

Without a stock market, traders would have no motivation to exist.

Without a stock exchange, organizations would have no formal system on which to rundown offers.

Types 

OTC, ECN, and Stock Exchange 

NSE, BSE, DOW JONES, and NYSE 

Clearing House 

Stock market does not work as a clearing house. 

Works as a clearing house.

Motive

Stock markets are only general meeting places for stock traders to conduct all the activities relating to trading.

Stock exchanges work under a profit motive. 

How do Stock Markets work?

Stock markets are known to everyone, but its working is something which is not understood by all. And this is mostly due to the lack of financial knowledge. But, the working of stock markets is not rocket science. Rather it's very simple and can be understood by anyone.

Just as we go to the vegetable market to buy vegetables or even go online nowadays to buy it, similarly, when you are ready to buy stocks, you can buy them online through the stock market. 

The concept of the working of the stock market is pretty simple. Much like an auction house, the stock market allows buyers and sellers to negotiate prices and make trades.

The working of stock markets is based on a network of exchanges. You must have heard of the New York Stock Exchange or the Nasdaq. Companies list shares of their stock on an exchange through a process named as an initial public offering, or IPO.

Those who wish to invest, purchase those shares, which in turn enables the company to generate money to grow its business to the next levels of success. Investors can then purchase and sell these stocks among themselves, and the exchange trails the supply and demand of all the stocks that are listed. This supply and demand later help in determining the price of each security.

Afterwards, a bid is offered by the buyers, which is the highest amount that the buyers are willing to pay. This price is generally lower than what sellers ask for an exchange, and this difference is generally known as the bid-ask spread.

Those who are beginners in the stock market fear these calculations. So, for their information, these calculations are done by computer algorithms. And these bids, ask and bid-ask spread are also shown on the site of the brokers.

Earlier, this trading used to happen in physical form. There was a market for this buying and selling. But today, like every other thing, the stock markets also work electronically and online through the internet. 

How do Stock Exchanges work?

The best thing about the workings of Stock Exchanges is that they work independently as there are no market makers or specialists in between. The entire process of Stock Exchanges is order-driven, and like stock markets, it is also electronic.

There is an electronic order book for this. In this setup, the orders are automatically matched with the help of trading computers.

The greatest thing about this set up of stock exchanges of India is that there is transparency in the functioning as everything is done publicly.

Currently, the system which is placed by the stock exchanges is functioning at its best. They are helpful for buyers, sellers and even brokers. All can avail of the benefits of Direct Market Access (DMA). 

Final Thought

The trading system of India leaves you with no reason to say no to investing in India. Whether it's safety & security, speed of orders, fast service of brokers, or transparency, the setups of Stock markets and stock exchanges are always ahead.

As described above, the workings of stock markets and stock exchanges are not rocket science and could be understood and managed by anyone who seeks to invest and generate money.

So, if you are someone who has come out of the dilemma of stock markets and stock exchanges and now wants to have an additional source of income besides your regular income, then start looking for your stock exchanges body today!

About the Author: Aditi Sagar | 26 Post(s)

Aditi is born and brought up in New Delhi. Right now she is in the 2nd year of her college. She is pursuing graduation from Deen Dayal Upadhaya College, Delhi University with Bachelor's In Management Studies degree. 

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