Understanding the Functions of Stock Exchange

Understanding the Functions of Stock Exchange

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Jaya
Jaya Sharma
Assistant Manager - Content
Updated on Jun 17, 2024 15:37 IST

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.

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In this article, we will focus on the functions of stock exchange and what is its importance for individual investors and companies. 

Table of Contents

What is a 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

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.

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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. 

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.

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. 

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.

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. 

Also read: What are the Functions of Money Market?

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.

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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.

About the Author
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Jaya Sharma
Assistant Manager - Content

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