Understanding the Functions of Stock Exchange
There are several functions of stock exchange such as maintaining liquidity in market, securing transactions and building a healthy economy among other functions. Due to these functions, stock exchanges are the crucial part of every economy. On a thorough analysis of the exchange, experts can understand the state of any economy. They can also identify sectors that are growing and the ones that require push.
In this article, we will focus on what is stock exchange, the functions of stock exchange and what is its importance for individual investors and companies.
Table of Contents
- What is stock exchange?
- Functions of stock exchange
- Determining the security prices
- Maintaining Liquidity
- Indicating the Economic State
- Facilitating investments
- Raising capital
- Building a healthy economy
- Providing rights to investors
- Attracting foreign investments
- Security of Transactions
- Speculation of Securities
- Developing the Habit of Savings
- Mergers and Acquisition
- Contributing to Company's Growth
- Features of Stock Exchange
- List of popular stock exchanges
- Importance of stock exchange
- How Does Stock Exchange Work?
What is stock exchange?
A stock exchange or securities exchange is an organized financial market where traders trade in securities. In these exchanges, the issue and redemption of securities are also performed. Stock exchanges function as ‘continuous auction’ markets where traders consummate transactions through electronic trading platforms. It is a stock market where listed securities of companies, government, and semi-government organizations are traded.
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Functions of Stock Exchanges
The following are the different functions of stock exchange:
1. Determining the security prices
One of the main functions of stock exchanges is determining the prices of securities. Since the stock exchange operates on the demand and supply of securities, this concept is leveraged for determining the prices on a continuous basis. Speculation accelerates this demand and supply in the market. The securities that are growth-oriented and profitable have a higher value. Based on this valuation of securities, investors and traders can assess and determine the security that will give them the most returns on investments.
2. Maintaining Liquidity
One of the most important functions of stock exchange is maintaining liquidity. As securities can be easily sold and bought on an exchange, there is a higher probability of converting them into cash. This function allows investors to stay confident about trading in the stock exchange.
3. Indicating the Economic State
One of the important role of stock exchange in India is highlighting the nation's economic state. Stock exchanges can very effectively indicate the economic state of the country. Traders can identify the industries that are growing and that are seeing a downfall. On a macro level, you can identify sectors that are booming. At a micro level, you can identify the particular companies that are facing losses. Overall, the entire picture of an economy can be understood through the situation of a stock exchange.
4. Facilitating investments
Stock exchanges function according to the guidelines of regulatory bodies such as SEBI in India. Due to the presence of a regulatory bodies, investors and traders feel safe investing in this market. This facilitates the culture of investment since a great amount of profits can be earned through trading in the stock exchange. In fact, long term trading can help in compounding your money. Overall, one of the important functions of stock market is to encourage investors to make more investments in the market.
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5. Raising capital
For companies, an important function of stock exchange is raising capital. With an increase in the security prices, companies can raise capital to fund their business operations and projects. This helps in the growth of industries within the country. Many companies can even come back from losses by raising capital from traders in the stock exchange.
6. Building a healthy economy
Investors and companies together build their corpus through stock exchange. This is an important function of stock exchange. While companies are the most profitable among other market players, individual investors also make huge profits in the exchange. However, it is noticeable that there is an equal chance of profit as well as loss. Stock exchange functions in a way to ensure that there remains a balance between profits and losses in the market which ensures a healthy economy.
7. Providing rights to investors
Through the stock exchange, traders invest in equity shares which enable them with voting rights. As the number of shares goes up, traders get the right to vote and also get a part in the profit earned by the company. The more an investor gets the hold on the number of share, the more is their ownership in the company. In short, providing and safeguarding the rights of investors is an important function of stock market.
8. Attracting foreign investments
One of the important functions of stock exchange is attracting funds from foreign entities. This increases the influx of the capital within the national market which in turn, increases the opportunity to earn more.
9. Security of Transactions
The companies listed on the stock exchange have to undergo scrutiny before they are listed on the exchange. These listed companies have to operate under strict regulations due to which investors can trust the company. Ensuring that all transactions in the stock market are secured is an important stock market function.
10. Speculation of Securities
Stock exchanges allow speculation of securities based on supply and demand. This is done in a healthy manner. The security offered by profitable businesses is valued higher. A company with a low reputation may suffer from the risk of a lower valuation.
11. Developing the Habit of Savings
One of the latent functions of stock exchange is helping people develop the habit of savings. Even though there is risk in investing in stock market, there is a good chance of earning money if investment is done wisely and carefully.
12. Mergers and Acquisition
An important stock exchange functions is to help companies evaluate the potential companies to be acquired. The stock exchange provide the real-time market capitalization data which helps in determining the value of a publicly traded company that is involved in the merger and acquisition deal.
13. Contributing to Company's Growth
An important function of stock exchange is to help companies grow. In the stock exchange, a company can get thousands of investors who are ready to invest in the company. This will help the company in raising funds which ultimately leads to the growth of the company.
Features of Stock Exchange
Following are the features of the Stock Exchange:
- Within the stock exchange, second-hand securities associated with shares and bonds that are preannounced by the company are traded.
- Stock exchange is a comprehensive financial market where government, semi-government and corporate company securities are traded.
- Securities can be traded and transacted only through authorized brokers and members on the stock exchange.
- All securities at the stock exchange are regulated by SEBI guidelines and are controlled by exchange rules.
- Only those securities listed on the stock exchange can be traded.
List of Popular Stock Exchanges in the World
Below is the list of the most popular stock exchanges in the world.
- NYSE: This is the world’s largest stock exchange in the world in terms of the market capitalization of listed companies.
- Nasdaq: This is another American stock exchange that is considered to be the second largest in terms of the market capitalization of the traded shares.
- NSE: National Stock Exchange is the leading exchange that is the fourth largest in the world according to trading volume.
- BSE: Bombay stock exchange is the tenth oldest stock exchange in the world, with more than 6000 companies listed in it.
- LSE: London Stock Exchange is the main stock exchange of the United Kingdom. Within this exchange, FTSE 200 index is the dominant index. It has now merged with Milan Stock Exchange, the Borsa Italiana, to form London Stock Exchange Group.
Importance of Stock Exchange
A stock exchange is a marketplace filled with the opportunity of investing for traders. One of the important roles of stock exchange is to grow their funds. With proper study and analysis, they can get huge positive returns on investments. Profits through trading are much higher than any other investments. However, there is an equal risk probability. Not only do individual investors multiply their funds in the stock exchange, but also huge organizations also raise capital to fund their operations. Overall, a healthy and operational stock exchange can stabilize the economy and increase liquidity in the market.
How Does Stock Exchange Work?
A stock exchange is a type of marketplace where shares of publicly traded companies are traded. The below mentioned points explain how it takes place:
1. Stock Listings Companies "go public" through an Initial Public Offering (IPO), where they list their shares on a stock exchange such as the NYSE or NASDAQ. This allows them to raise money by selling ownership stakes to investors.
2. The following trading mechanism is followed for smooth trading in the market:
- Buyers and sellers do not interact directly. Instead, trading is done through brokers who match orders.
- When investors want to buy shares, they place an order specifying the stocks, how many shares are required and at what price.
- If someone is selling at that price, the trade executes automatically.
3. Price determination of stocks is performed in the following manner:
- Stock prices move on the basis of supply and demand. Whenever more people want to buy instead of selling the share, the prices will go up. Whenever investors more want to sell than buy, prices go down.
- These changes can be influenced by company performance, economic conditions, market sentiment, industry trends and global events. The changes are also impacted by marketing participants, including Individual investors, Institutional investors (mutual funds, pension funds), Market makers and brokers who execute trades.
Conclusion
These are the stock exchange functions that are crucial for investors and traders. The role of stock exchange is just not limited to bringing in investments but also it is a place where with appropriate understanding, you can compound your money quickly.
FAQs
What are the functions of stock exchange?
The functions of stock exchange include bringing in foreign investments, managing and building the economy, raising capital, bringing in investments and maintaining liquidity.
How does a stock exchange facilitate trade?
A stock exchange provides a centralized location where trading takes place. It matches buy and sell orders through a trading system, ensuring efficient and transparent transactions.
What role does a stock exchange play in price determination?
A stock exchange helps determine the prices of securities through the interaction of buyers and sellers. Prices fluctuate based on demand and supply conditions, allowing for a transparent and fair price discovery process.
Why is liquidity crucial in a stock exchange?
Liquidity is crucial because it ensures that investors can quickly buy or sell securities without significantly affecting their prices. High liquidity means that there are always ready buyers and sellers, making the market more attractive to investors.
How do companies raise capital through a stock exchange?
Companies raise capital through the issue new shares to public in an Initial Public Offering (IPO) or through the issue of additional shares if they are already listed. Investors purchase these shares, providing the company with funds to grow and expand its operations.
What regulatory functions does a stock exchange perform?
A stock exchange enforces rules and regulations to ensure fair trading practices, protect investors, and maintain market integrity. This includes monitoring trading activities, ensuring compliance with listing requirements, and taking action against fraudulent activities.
What is the role of a stock exchange in investor protection?
A stock exchange protects investors by ensuring transparency, enforcing regulations, and providing timely and accurate information about listed companies. This allows investors in making informed decisions and prevent the risk of fraud.
What is the primary function of a stock exchange?
The primary function of stock exchange is ensuring that buying and selling of stocks take place continously in the market. The aim is to keep market in a healthy state.
What are the four types of stocks?
The four types of stocks include the common stock, preferred stock, growth stock and yield stock/dividend.
Jaya is a writer with an experience of over 5 years in content creation and marketing. Her writing style is versatile since she likes to write as per the requirement of the domain. She has worked on Technology, Fina... Read Full Bio
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