Question

Explain the functions of Stock Exchange.

Answer 1

1. Mobilisation of Savings: Stock markets are organised and regulated market which protects the interests of the investors. This encourages small and big investors to invest in securities through the stock exchange. It thus provides a ready market for buying and selling securities.
2. Capital formation: Investors in securities are attracted due to good returns on investments and capital appreciation. This attracts more investors to invest through the stock exchange. Corporates too can easily raise funds by offering various types of securities to meet the needs of different types of investors. Thus Stock exchange serves as a tool for capital formation.
3. Pricing of Securities: The stock market helps to value the securities on the basis of demand and supply factors. The securities of profitable and growth-oriented companies are valued higher as there is more demand for such securities. The valuation of securities is useful for investors, government, and creditors. The investors can know the market value of their investment. The creditors can estimate the credit worthiness of a company.
4. Economic Barometer: A stock exchange is a reliable barometer to measure the economic condition of a country. Every major change in the country and economy is reflected in the prices of shares. The rise or fall in the share prices indicates the boom or recession cycle of the economy. The stock exchange is also known as a pulse of the economy or economic mirror as it reflects the economic conditions of a country.
5. Protecting Interest of Investors: Stock exchange protects the interest of investors. In the stock market, only the listed securities are traded. The stock exchange allows listing only after verifying the soundness of the company. The companies which are listed have to operate within the strict rules and regulations laid down by the stock exchange. This ensures the safety of dealing through the stock exchange.
6. Liquidity: The main function of the stock market is to provide a ready market for the sale and purchase of securities. The presence of the stock market gives assurance to investors that their investment can be converted into cash whenever they want. Investors can invest in long-term investment projects without any hesitation, as because of the stock exchange they can convert the long-term investment into short-term and medium-term or even liquidate their investments whenever they want.
7. Better Allocation of Capital: The shares of profit-making companies are quoted at higher prices and are actively traded so such companies can easily raise fresh capital from the stock market. The prices of securities traded in the exchange indicate the opportunities for investments. So stock exchange facilitates the allocation of investors' funds to productive and profitable channels.
8. Contributes to Economic Growth: In the stock exchange, securities of various companies are bought and sold. Investors invest in companies which give a good return on investments. Hence companies, too, try to invest in the most productive investment projects. This leads to the capital formation as well as economic growth.
9. Providing Scope for Speculation: To ensure liquidity and demand or supply of securities the stock exchange permits healthy speculation of securities.
10. Promotes the Habit of Savings and Investment: The stock market offers attractive opportunities for investment in various securities. These attractive opportunities encourage people to save more and invest in securities of the corporate sector rather than investing in unproductive assets such as gold, silver, etc.