What It Means
A network effect happens when new users make a service more useful for existing users. Think of a buying-and-selling website: more sellers give buyers more choice, while more buyers make the site attractive to sellers. Simply having lots of customers is not enough; each new user must add value to others.
Why It Matters
A growing network can attract even more people. This makes it harder for a new company with fewer users to compete. But the advantage can weaken if people use several rival services, or if the service becomes crowded and less useful.
What Investors Should Check
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Are users active, not just registered?
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Does each new user add value?
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Do buyers and sellers keep coming back?
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Can people easily use rival platforms?
The NSE Example
The National Stock Exchange brings together people who want to buy and sell shares. More buy and sell orders can make it easier to trade quickly at competitive prices. This can attract more traders, although fees, rules and overall market activity also matter.