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 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
Some of the significant objectives or functions of the Stock Exchange are listed below:
- Economic Barometer: A stock exchange is a solid barometer to gauge the economic circumstance of a country. A stock exchange is also known as a pulse of the economy or economic mirror which reflects the economic conditions of a country.
- Pricing of Securities: The stock market helps to assess the securities on the basis of demand and supply factors. The securities of effective and growth-oriented organisations are estimated higher as there is more demand for such securities.
- Safety of Transactions: In the stock market only the indexed securities are traded and stock exchange authorities include the corporations named in the trade list only after verifying the soundness of the organisation. The organisations which are listed also have to function within the stringent rules and regulations. This guarantees the security of dealing through the stock exchange.
- Contributes to Economic Growth: In stock exchange securities of various organisations are traded. This method of disinvestment and reinvestment helps to invest in the most productive investment proposal and this leads to capital structure and economic growth.
- Spreading of Equity Cult: Stock exchange urges people to invest in ownership securities by managing new issues, better trading practices and by educating the people about investment.
- Providing Scope for Speculation: To assure liquidity and demand of supply of securities the stock exchange allows healthy consideration of securities.
- Liquidity: The principal purpose of the stock market is to present a ready market for sale and purchase of securities. The presence of the stock exchange market gives certainty to investors that their investment can be transformed into cash whenever they want.
- Better Allocation of Capital: The shares of profit-making organisations are valued at higher prices and are actively traded so such organisations can efficiently raise capital from the stock market.
- Promotes the Habits of Savings and Investment: The stock market gives attractive chances for investment in different securities. These attractive opportunities inspire people to save more and invest in securities of the corporate sector rather than investing in unfruitful assets such as gold, silver, etc.,
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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 recognized 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 is the concept, that is elucidated in detail about ‘What is a stock exchange?’ for the Commerce students. To know more, stay tuned to BYJU’S.