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Question
Write notes on.Functions of stock exchange.
Solution
Meaning: - Stock exchange is a specific place where trading of the securities is arranged in an organised method. In simple words it is a place where shares, debentures and bonds (securities) are purchased and sold. The term securities include equity shares, preference shares, debentures, government bonds, etc. including mutual funds.
Presence and vibrant functioning of a stock exchange is necessary for developing economy. It reflects a healthy financial and investment conducive atmosphere in the economy.
The Indian securities market is considered as one of the most promising emerging markets. It is one of the top eight markets of the world.
- Liquidity: -It is the Stock Exchange that provides liquidity to private investment in corporate enterprises. The stock exchange provides marketability along with liquidity to the product called securities.
- Fair Evaluation of Securities: -Stock exchanges like any other market provide amechanism (instrument) for evaluating the prices of securities through the basic law of demand and supply. Stock exchange prices help to check the real worth of the securities in the market.
- Promotes capital Formation: -Stock exchange motivates the investors to invest their savings in the securities of the reputed companies. As stock exchange is the creation of continuous market where buying and selling of securities continuously goes on. As a result, capital flows continuously into business field. Thus formation of capital goes on.
- Protects investors’ interest: -All the transactions in the stock exchanges are effected and controlled by the securities control (regulation) Act 1956. The stock exchanges protect the interest through the strict enforcement of their rules and regulations.
- Economic Barometer: -A stock exchange serves as a reliable barometer of a country’s economic status. ‘Stock exchanges support and promote industrial development. It stimulates investment in productive sector which accelerates the process of economic development of the nation.
- Motivation to the management to improve its performance: -An exchange allows the trading of listed securities only. While getting the shares listed on exchange, a company is required to follow certain guidelines for protecting the interest of shareholders.
- Regulation of speculative transaction: - Speculation is an important part of stock exchange operations. The stock exchange enables speculators to speculate and secure adequate profits through fluctuation in security prices.
Best utilisation of capital: -The Stock exchange regulates and controls the flow of investment from unproductive to productive, uneconomic to economic, unprofitable to profitable enterprises. Thus, savings of the people are channelized into industry yielding good return and underutilisation of capital is avoided
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Mr. A. Bose is running a successful business. Mr. Bose is the owner of R. K. Cement Ltd. Mr. Bose decided to expand his business by acquiring a Steel Factory. This required an investment of Rs. 60 crores. To seek advice in this matter, he called his financial advisor Mr. T. Ghosh who advised him about the judicious mix of equity (40%) and Debt (60%). Employ more of cheaper debt may enhance the EPS. Mr. Ghosh also suggested him to take loan from a financial institution as the cost of raising funds from financial institutions is low. Though this will increase the financial risk but will also raise the return to equity shareholders. He also apprised him that issue of debt will not dilute the control of equity shareholders. At the same time, the interest on loan is a tax-deductible expense for computation of tax liability. After due deliberations with Mr. Ghosh, Mr. Bose decided to raise funds from a financial institution.
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