How Do Stock Exchanges Make Money?

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You can refer to Stock Exchanges as a market place for buying and selling securities like stocks, corporate bonds as well as derivative instruments.

While stock exchanges can help us make money by providing us a platform to trade/invest in securities, have you ever wondered how stock exchanges make money?

In this post we discuss the revenue model of Stock Exchanges.

Membership Fees:

Stock Exchanges function as a marketplace for buying and selling in securities. However, remember that securities cannot directly be bought from or sold to a stock exchange. To buy and sell securities in a stock exchange, one has to deal with a broker.

A broker is a member of the stock exchange licensed to execute buy and sell transactions (of securities) on behalf of clients (like you and me) in exchange for a fee.

A broker has to pay an annual membership fee to the stock exchanges to execute security transactions on behalf of their clients. This fee forms part of the annual revenue of a stock exchange.

Transaction Charges:

Stock Exchanges charge a transaction fee for facilitating the buying and selling of securities through their platform. The transaction fee, based upon the value of securities bought or sold, is charged from the brokers who then recover the same from their clients.

The transaction changes form one of the most important sources of revenue for the Stock Exchanges.

Listing Fees:

Listing fees are the fees paid by the companies to list their equity or debt securities on the stock exchanges.

Listing allows companies to raise capital as well as make their securities available for buying and selling through the auspices of a stock exchange. Listing fees are generally annual in nature.

Listing Fees are also paid by Mutual Fund companies to list their closed-ended schemes on the Stock Exchanges.

Book Building Fees:

Book Building is a process of price-discovery through bids in an Initial Public Offer (IPO).

An Initial Public Offer is the process through which a privately held organisation offers its shares to the public for the very first time. Post a successful IPO, the shares of the company (to the extent of the shares offered in the IPO) would be listed on the stock exchange.

In an IPO generally, a price band is announced, and within this price band, bids are invited from the public. The issue price i.e the price at which the shares are finally offered in the IPO is determined on the basis of bids received at the various price points within the price band.

This process of price discovery, known as book building, is facilitated by the stock exchanges. Book Building Fee is the fee charged by the stock exchanges from the corporates offering their shares in an IPO.

Data Dissemination Charges:

Data dissemination charges are earned by the Stock Exchanges for disseminating price, volume and other market relating data of securities traded in the exchange to various agencies like stock brokers, fund houses, TV channels, financial websites and research houses.

Training & Education:

Stock Exchanges often impart training and certification on the financial markets and earn revenue from such training programmes. The training is often imparted by a subsidiary formed specifically for the purpose of training and certification.

Clearing Fees:

Clearing Fees are related to the clearing and settlement of the trades executed in the Stock Exchanges.

The above are the different ways in which Stock Exchanges make money.

Hope you liked our presentation on the revenue model of stock exchanges. Keep visiting FinMint for more.

You might also want to learn how you can make your own stock market index.

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