Stock Exchange

The Securities Contract and Regulation Act defines a stock exchange as, “An organisation or body of individuals, whether incorporated or not established for the purpose of assisting, regulating, and controlling of business in buying, selling, and dealing in securities.”

Functions of Stock Exchange/Secondary Market

The functions of stock exchange are as follows:

1. Economic Barometer

A stock exchange is a reliable barometer that helps in the measurement of economic conditions of a country. If there is a major change in a country and economy, it is reflected through the price of shares. In other words, a rise or fall in the price of shares indicates the boom or recession cycle of the economy. As the stock exchange reflects the economic conditions of a country, it is also known as a Pulse of Economy or Economic Mirror.

2. Pricing of Securities

The stock market helps in valuing securities based on the demand and supply factors. The demand for the securities of profitable and growth-oriented companies is more; therefore, they are valued higher. This valuation of securities is essential for the government, investors, and creditors. With this, the government can impose taxes on the value of securities, investors can know the value of their investment in securities, and the creditors can value the creditworthiness of the company.

3. Safety of Transactions

Only the listed securities are traded in the stock market. Besides, the stock exchange authorities consist of the company’s names in the trade list only after they have verified the soundness of the company. The companies listed in the stock exchange have to operate within the strict rules and regulations laid down by the authority, as it helps in ensuring the safety of dealing through stock exchange. 

4. Contributes to Economic Growth

Securities of various companies are bought and sold on a stock exchange. This process of disinvestment and reinvestment in securities helps a trader invest in the most productive investment proposal. This result leads to capital formation and economic growth of a country.

5. Spreading of Equity Cult

Stock exchange regulates new issues, provides better trading practices, and educates the public about the investment to encourage people to invest in the ownership securities.

6. Providing Scope for Speculation

The stock exchange permits health speculation of securities so that it can ensure liquidity and demand of supply of securities.

7. Liquidity

The main function of stock market is provision of ready market for the sale and purchase of securities. The presence of stock exchange market assures the investors that they can convert their investment into cash whenever they want. Because of the stock exchange, investors can without hesitating, invest in long-term investment projects. Besides, with the help of stock exchange, investors can convert their long-term investments into short-term and medium-term investments.

8. Better Allocation of Capital

The shares of a profit-making company are quoted at a higher price and are traded actively so that the companies can easily raise fresh capital from the stock market. As the general public hesitates while investing in securities of a loss-making company, the stock exchange helps by facilitating the allocation of investor’s funds to profitable channels.

9. Promotes the habits of Savings and Investment

To promote the habit of savings and investment among people, the stock market offers attractive opportunities for investment in different securities to them. With these opportunities, people save more and invest in the securities of the corporate sector rather than investing in unproductive assets like silver, gold, etc.

A market that serves as a link between the savers and borrowers by transferring the capital or money from those who have a surplus amount of money to those who are in need of money or investment is known as Financial Market. Simply put, Financial Market is a market that creates and exchanges financial assets. In general, the investors are known as the surplus units and business enterprises are known as the deficit units. Hence, a financial market acts as a link between surplus units and deficit units and brings the borrowers and lenders together.