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Stock Exchange Functions

Stock Exchange Functions

The Stock Exchange is a market place where investors buy and sell securities.

Stock Exchange Functions can be summarized as follows:

(a) Liquidity and Marketability of Securities: The basic function of the stock market is the creation of a continuous market for securities, enabling them to be liquidated, where investors can convert their securities into cash at any time at the prevailing market price. It also provides investors the opportunity to change their portfolio as and when they want to change,i.e. they can at any time sell one security and purchase another, thus giving them marketability.

(b) Fair Price Determination: This market is almost a perfectly competitive market as there are large number of buyers and sellers. Due to nearly perfect information, active bidding take place from both sides. This ensures the fair price to be determined by demand and supply forces.

Stock Exchange Functions

(c) Source for Long term Funds: Corporates, Government and public bodies raise funds from the equity market. These securities are negotiable and transferable. They are traded and change hands from one investor to the other without affecting the long-term availability of funds to the issuing companies.

(d) Helps in Capital Formation: There is nexus between the savings and the investments of the community. The savings of the community are mobilized and channeled by stock exchanges for investment into those sectors and units which are favoured by the community at large, on the basis of such criteria as good return, appreciation of capital, and so on. It is the preference of investors for individual units as well as industry groups, which is reflected in the share price, that decides the mode of investment. Stock exchanges render this service by arranging for the preliminary distribution of new issues of capital, offered through prospectus, as also offers for sale of existing securities, in an orderly and systematic manner.

Stock Exchange Functions


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