Meaning of Stock Exchange
A stock exchange is an important factor in the capital market. It is a secure place where trading is done in a systematic way. Here, the securities are bought and sold as per well-structured rules and regulations. Securities mentioned here includes debenture and share issued by a public company that is correctly listed at the stock exchange, debenture and bonds issued by the government bodies, municipal and public bodies.
Typically bonds are traded Over-the-Counter (OTC), but a few corporate bonds are sold in a stock exchange. It can enforce rules and regulation on the brokers and firms that are enrolled with them. In other words, a stock exchange is a forum where securities like bonds and stocks are purchased and traded. This can be both an online trading platform and offline (physical location).
Functions of Stock Exchange
Following are some of the most important functions that are performed by stock exchange:
- Role of an Economic Barometer: Stock exchange serves as an economic barometer that is indicative of the state of the economy. It records all the major and minor changes in the share prices. It is rightly said to be the pulse of the economy, which reflects the state of the economy.
- Valuation of Securities: Stock market helps in the valuation of securities based on the factors of supply and demand. The securities offered by companies that are profitable and growth-oriented tend to be valued higher. Valuation of securities helps creditors, investors and government in performing their respective functions.
- Transactional Safety: Transactional safety is ensured as the securities that are traded in the stock exchange are listed, and the listing of securities is done after verifying the company’s position. All companies listed have to adhere to the rules and regulations as laid out by the governing body.
- Contributor to Economic Growth: Stock exchange offers a platform for trading of securities of the various companies. This process of trading involves continuous disinvestment and reinvestment, which offers opportunities for capital formation and subsequently, growth of the economy.
- Making the public aware of equity investment: Stock exchange helps in providing information about investing in equity markets and by rolling out new issues to encourage people to invest in securities.
- Offers scope for speculation: By permitting healthy speculation of the traded securities, the stock exchange ensures demand and supply of securities and liquidity.
- Facilitates liquidity: The most important role of the stock exchange is in ensuring a ready platform for the sale and purchase of securities. This gives investors the confidence that the existing investments can be converted into cash, or in other words, stock exchange offers liquidity in terms of investment.
- Better Capital Allocation: Profit-making companies will have their shares traded actively, and so such companies are able to raise fresh capital from the equity market. Stock market helps in better allocation of capital for the investors so that maximum profit can be earned.
- Encourages investment and savings: Stock market serves as an important source of investment in various securities which offer greater returns. Investing in the stock market makes for a better investment option than gold and silver.
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Features of Stock Exchange:
- A market for securities- It is a wholesome market where securities of government, corporate companies, semi-government companies are bought and sold.
- Second-hand securities- It associates with bonds, shares that have already been announced by the company once previously.
- Regulate trade in securities- The exchange does not sell and buy bonds and shares on its own account. The broker or exchange members do the trade on the company’s behalf.
- Dealings only in registered securities- Only listed securities recorded in the exchange office can be traded.
- Transaction- Only through authorised brokers and members the transaction for securities can be made.
- Recognition- It requires to be recognised by the central government.
- Measuring device- It develops and indicates the growth and security of a business in the index of a stock exchange.
- Operates as per rules– All the security dealings at the stock exchange are controlled by exchange rules and regulations and SEBI guidelines.
The above mentioned concept ‘What is a stock exchange?’ is elucidated in detail for Commerce students. To know more, stay tuned to BYJU’S.
Frequently Asked Questions on Stock Exchange
Q.1 Why is the stock exchange important?
Stock markets help companies to trade publicly in order to raise capital. It acts as a platform for sale and purchase of securities.
Q.2 What are the 4 types of stocks?
Following are the 4 types of stock:
- Preferred stock
- Common stock
- Growth stock
- Yield stock (Dividend)
Q.3 What is the purpose of the stock exchange?
The purpose of a stock exchange is to help in capital formation and act as intermediary between companies and investors by providing a common platform for exchange.
Q.4 What are some examples of a stock exchange?
Some examples of stock exchanges across the globe are: