Functions of Stock Exchanges
The stock market occupies an important place in the financial system of our country, which is of vital importance for the proper functioning of the corporate enterprises. At the same time, the stock exchanges are seen as very useful institutions as they provide a variety of services to the investors. Important functions of stock exchanges are briefly explained below.
1. Marketability of securities
Stock exchanges are the markets for purchasing and selling securities. As they provide a ready and continuous market for securities, the securities can be converted into cash without delay.
2. Evaluation of securities
In stock exchanges, prices of securities are determined by investors’ demand and suppliers’ preferences. Stock exchanges integrate the demand and supply of securities and determine their prices on a continuous basis. The prices prevailing in the stock exchanges are called quotations. These quotations enable the investor to evaluate the value of his shareholding.
3. Safety of investment
Stock exchanges operate under the rules, bye-laws and regulations duly approved by the government. The members of stock exchange are bound by them. Stock exchanges provide the most perfect type of market by making the transactions publicly known to the investors. Besides this, they avoid over trading and speculation through various regulatory measures. These factors ensure a great measure of safety and fair dealing to the investors.
4. Capital formation
Capital formation occurs due to savings and investments. Stock exchanges facilitate capital formation in the country. They create the healthy habit of saving, investing and risk bearing among the investors. The prices quoted in stock exchanges indicate the extent of popularity of companies. Investors are attracted towards profitable companies and come forward to invest their savings in the corporate securities. Thus, stock exchanges facilitate flow of capital into more profitable channels.
5. Regulation and Motivation of Companies
Companies wishing to list their shares on a stock exchange should follow certain rules and regulations. For example, every year, they should submit to stock exchange all relevant data relating to their financial affairs. So, the listing companies will safegurad their interest by monitoring their financial performance carefully. Thus, the stock exchanges by quoting the prices of securities motivate the companies concerned to improve their financial performance.
6. Facilitates for healthy speculation
Speculation is taking advantage of fluctuations of price movement. With regard to securities market, healthy speculation is essential to equate demand and supply of securities at different places. Further, it regulates the prices of securities to a great extent. The mechanism of stock exchanges encourages healthy speculation thereby enabling the shrewd investors to benefit from price fluctuations.
7. Barometer of business progress
Stock exchanges reflect the prevailing business conditions in the country. Booms and depressions are reflected by the index prices of various securities traded in the stock exchange. By analyzing the causes for such changes in business conditions, the government can take suitable fiscal measures.