A stock exchange is a highly organized financial market where second-hand securities can buy and sell. Its main function is to create a link between buyers and sellers.
Functions Of Stock Exchange Market
A) Ready market and liquidity: Stock exchange provides a ready and continuous market where investors can convert their money into securities easily and promptly.
It provides a convenient meeting place for buyers and sellers of securities. Regular dealing in securities ensures increased liquidity of the securities.
B) Evaluation of securities: Stock exchange helps in deciding the costs of different securities that help their genuine worth. It enables the correct appraisal of securities.
The forces of demand and supply act freely in the stock exchange and help in the valuation of securities. The prices at which transactions take place are recorded and made public in the form of market quotations to enable the investors to know the current market prices of various securities.
C) Mobilization Of Savings: Stock exchanges ensure helps in mobilizing surplus funds of individuals and instructions for investment in securities.
In the absence of facilities for the quick and profitable disposal of securities, such funds may remain idle.
C) Protection Of Investors: Stock exchange ensure fair dealing and safety of dealing. The members of the stock exchanges have to operate under certain rules and regulations which seek to check the exploitation of ignorant investors.
In the way, the stock exchange serves as the watch-dog of the investor’s interests.
D) Capital formation: Stock exchange not only mobilizes the old savings but also induces the public to save money. It provides an avenue for investment in various securities that yield higher returns.
It helps in the rational allocation of available funds and directs the flow of savings into most productive channels. Thus, stock exchange facilities capital formation in the country.
E) Regulation Of Corporate Sector: Stock exchanges frame their rules and regulations. Every company which wants it’s securities to be dealt in at the stock exchange has to follow the rules framed by the stock exchange in his regard.
In this way, stock exchanges practice a sound impact on the working and the board of organizations.
F) Clearinghouse of data: A stock exchange is a vehicle of helpful business data. Many stock exchanges publish directories that provide data on the general economic and business trends. Such information influences decision making of business concerns, investors, etc.
G) Transfer: The basic functions of the stock exchange is to transfer purchasing power between countries I.e to provide a platform whereby the currency of one country is converted into the currency of another country at the prevailing exchange rate.
The transfer function is performed through credit instruments like the foreign bill of exchange, Bank draft and telephonic transfers.
H) Promotes Credit: This is another important function of the stock exchange that it provides Foreign bills of exchange used in the international payments normally have a maturity period of three to six months.
This period of credit is required to enable the importer to take possession of goods, sell them and realize money to make payments to the exporter.
The stock market performs the function of providing credit to promote foreign trade. The credit function is performed through the acceptance houses that accept bills on behalf of their customers.
I) Facilitates hedging: In a situation of exchange risks, the stock exchange performs the hedging function.
Hedging is the act of equating one’s assets and liabilities in a foreign currency to avoid the risk resulting from future changes in the value of the foreign currency.
In a free stock exchange market, when the value of foreign currency varies, there may be a gain or loss to the traders concerned.
To avoid or reduce this exchange risk, the exchange market provides facilities for hedging anticipated or actual claims or liabilities through forwarding contracts in exchange.
The forward agreement is an agreement of buying or selling foreign currency at some fixed date in the future at a value settled upon now.
J) Facilitates trade and investment: International trade and investment would not have been possible without the arrangements or mechanism for buying and selling foreign currency.
The stock exchange market is required to undertake import/export transactions. Foreign payment is made by converting money from one country into another at the prevailing exchange rate.
Facilitates of Stock exchange
The services of the stock exchange can be studied under the following heads :
Services to Companies or Corporate sector
A) A company whose shares are listed on a stock exchange enjoys a reputation in the capital market.
B) The marketability of shares is guaranteed and as a result, the organization appreciates a wide market for its shares.
C) Stock exchange helps to minimize fluctuations in the prices of securities. The forces of demand and supply interact freely on the stock exchange.
D) New companies may raise their funds easily from the capital market because it provided indirect support by the stock exchange.
Services to the Investors
A) Stock exchange ensures liquidity of investment by ready marketability of securities.
B) Stock exchanges make scrutiny before listing of securities. Thus, stock exchange ensures safe and fair dealing in securities.
C) Price quotations of stock exchange help the investors to know the market value of their investors.
D) The stock exchange serves as a clearinghouse of information and provides guidance to investors. The investors are spared from the danger of investment in unsound organizations.
E) The facility of quick disposal of securities at the stock exchange helps to diversify investment and risk.
Services to community Or society
A) Stock exchange generates economic growth by encouraging investors to invest their savings in securities. It encourages capital information in the country.
B) A stock exchange provides a forum for raising public debt which is required for projects of national importance.
C) Stock exchange helps in the process of economic development of the country. The rapid increase in the growth of the corporate sector in recent decades has been possible because of the facilities provided by the stock exchange.
D) Stock exchange helps in the optimum utilization of scarce financial resources.