Question

Answer in brief.

State any four functions of Stock Exchange.

Answer 1

The functions of Stock Exchange are as follows:

1. MOBILISATION OF SAVINGS- Stock markets are organized and regulated markets that protect the interest of the investors. So, investors can invest their savings in various securities through the stock exchanges without the fear of being cheated. Stock exchange provides a ready market for buying and selling of securities. Thus, stock exchanges help to mobilize the savings of people.
2. RESULTS IN CAPITAL FORMATION- Capital formation takes place when savings are invested in capital assets. Investors invest their savings in securities through stock exchange since securities provide good return on investments and also provide capital appreciation. Stock exchanges also enable the corporates to raise funds through the issue of various types of securities which meets the needs of different types of investors. The money collected by the corporates is invested by them in capital assets for further expansion of their business. So, savings of the people are invested in capital assets. Thus, stock exchange acts as a tool for capital formation.
3. BETTER ALLOCATION OF CAPITAL- The shares of profit making companies are traded on the stock exchange at a higher price and they are also actively traded. So, it is possible for profitable companies to raise fresh capital from the stock market easily. The prices at which the securities are traded in the exchange indicate the opportunities for investments. Stock exchange ensures that the investor’s funds are allocated to productive and profitable channels.
4. ECONOMIC BAROMETER- The stock exchange is a reliable barometer to measure the economic condition of a country. Any major changes in the country or the economy are reflected in the prices of shares. Any rise or fall in the share prices indicates the boom or recession period of the economy. Stock exchange is also known as a pulse of economy or economic mirror as it reflects the economic conditions of a country.
5. LIQUIDITY- Stock markets provide a ready market for the sale and purchase of securities. Hence, it gives a feeling of assurance to the investors that they can turn their investments into cash at any point of time by selling their securities. This also encourages investors to invest in long term investment projects without any hesitation as these investments can be converted to short or medium term or even be converted to cash whenever they want.
6. LEADS TO ECONOMIC GROWTH- Securities of various companies are traded on the stock exchange. Investors invest in those companies which give good return on investment. Hence, companies also try to invest in the most productive investment projects so as to give good return on investors’ money. This leads to capital formation and economic growth.
7. PRICING OF SECURITIES- The stock exchange helps to value the price of the securities on the basis of demand and supply factors. The securities of profitable companies have high value because of its high demand. Hence, the prices of securities reflect its profitability. This is useful to the investors, government and creditors. It helps the creditors to estimate the credit worthiness of a company.
8. PROTECTING INTEREST OF INVESTORS- Stock Exchange protects the interests of the investors. Only listed securities are traded on the stock exchange. Securities are listed on the stock exchange only after the soundness of the company is verified. The listed companies are required to operate within the strict rules and regulation laid down by the Stock Exchange. This ensures safety of the investors dealing through Stock Exchange
9. PROVIDING SCOPE FOR SPECULATION- The stock exchange permits healthy speculation of securities so that liquidity and demand or supply of securities is ensured. 
10. PROMOTES THE HABIT OF SAVINGS AND INVESTMENTS- The stock market offers attractive opportunities for investments which encourage people to save and invest more in securities of corporate sector rather than investing in unproductive assets such as gold, silver etc.