Stock Exchange: The Importance of Stock Exchange

Stock Exchange: The Importance of Stock Exchange

A stock exchange is a facility where stock traders and brokers can buy and sell securities, such as shares of stocks and bonds and other financial instruments.

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Stocks exchange may also provide for facilities the issue and redemption of such securities and instruments and capital events including the payment of income and dividends.

To be able to trade a security on a certain stock exchange, the security must be listed there. Usually, there is a central location at least for record keeping, but trade is increasingly less linked to a physical place, as modern markets use electronic networks, which give them advantages of increased speed and reduced cost of transactions.

Securities that are not listed on a stock exchange are sold OTC, which stands for Over-The-Counter. Corporations that have shares traded OTC are commonly smaller and riskier because they do not meet the requirements to be listed on a stock exchange.

A stock exchange is often the most significant component of a stock market. Stock exchanges also serve a financial function in providing liquidity to shareholders in providing an efficient means of disposing of shares.

The Importance of Stock Exchange

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1. Determination of Fair price

Stock exchanges help to ascertain fair prices for securities traded on them. Nonstop trading activity in stocks and debentures helps in discovering price of securities.

2. Providing quoting market prices

It makes feasible the determination of supply and demand on price. The very sensitive pricing mechanism and the continual quoting of market price enable investors to always be aware of values. This allows the production of various indexes which indicate trends etc.

3. Safety of Transactions

Stock exchanges are systematized markets. They fully keep the interest of investors. Every stock exchange has its own laws and bye-laws. Every member of stock exchange has to follow them and if any member is found violating them, his membership is cancelled.

For instance, if any trader working in stock exchange charges more commission than specified from any investor or misleads him in any other way, then the management team of the stock exchange can fine the trader and even his membership can be cancelled.

4. Regulation of the corporate sector

All listed firm in a stock exchange has to file documents in the stock exchange such as annual returns, and provide data regarding plans to merge with or acquire other firms, change in management, and plans to enter into new industries. This allows investors to plan their future investment based on data provided by the firms to the stock exchange.

5. Providing a ready market

The organization of stock exchange provides a ready market to traders and investors in industrial enterprises. It thus, allows the public to buy and sell securities now in issue.

6. Optimum resource allocation

Stock exchanges allow optimum allocation of scare capital resources. Capital is the life blood of all trades. Stock exchanges aid in the allocation of capital to corporations which are performing well and have potential for profitable growth in the future.

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7. Investor education

Stock exchanges provide vital information to the investors in their websites, publicize in newspapers and business magazines about the dos and don’ts in investing and encourage conduct of investor awareness programs. This allows investors both in the city as well in rural areas to become aware of stock market investment and make wise investment decisions.

8. Contributes to Economic Growth

A stock exchange provides liquidity to securities. This gives the investor a double benefit-first, the profit of the change in the market price of securities can be taken advantage of, and secondly, in case of need for money they can be sold at the current market price at any time.

These benefits provided by the share market encourage the people to invest their money in securities. In this way, people’s money gets invested in trades and financial development becomes feasible.

9. Mobilization of savings

Stock exchanges play a significant role in mobilizing savings of individuals and institutions. Savings so mobilized can be used to invest in many projects boosting industrial and financial development of a nation.

10. Protection of investors

Corporations which are listed in the stock exchanges have to obey various rules and regulations. They have to submit many documents and returns and provide data regarding any significant activity they plan to take on. Stock exchanges have formulated regulations to make sure security of investors’ funds.

11. New venture creation

Stock exchanges enable creation of new ventures. Any new venture requires financing. Stock exchanges are an important avenue for new ventures to raise capital for meeting their capital needs. The stock exchange has aided new venture creation by allowing promoters to increase the required funds.

For example, the remarkable development of Dependence can be credited to the public issues of shares on a large scale which provided the corporation large funds to employ in large scale projects.

Financial Services Agency.

12. Meeting financial needs of government

The government needs funds to take on many projects and government firms need funds for expansion, diversification etc. The Central and State governments, municipal corporations, state financial corporations etc. have raised cores through the issue of shares, bonds etc.

See also: Bonds: Types of Bonds and Foreign Currencies

13. Liquidity

Stock exchanges provide liquidity to investments made by investors. They serve as a platform where buyers and sellers of securities come into contact to buy and sell securities. Hence, any person who owns a security can sell his security in a stock exchange and convert into cash.

14. Facilitate transfer of ownership

Stock exchanges ease transfer of ownership of stocks, shares and securities. Securities are frequently traded on stock exchanges which help both the buyers and sellers of securities.

15. Opportunity to create wealth

Stock exchanges allow public to share in the wealth made by the company sector. They help investors who are spread across the length and breadth to buy securities issued by corporations. Dividends, bonus shares and benefit of increase in share prices are enjoyed by investors.

16.  Industrial development

Industrial development depends on the accessibility of funds for investment. Stock exchanges allow organizations to issue many types of securities according to their requirements and increase the necessary funds. Thus they aid in the financial development of a nation.

17. Attracting foreign investment

Stock exchanges aid in attracting foreign investment. They allow foreign institutional investors (mutual funds, pension funds, hedge funds, corporate of other countries) to invest in securities of Indian corporations. Thus they provide an opportunity to corporations to attract foreign investment.

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18. Reduced dependence on debt

Stock exchanges provide opportunity to firms to increase ownership capital. They allow governments to lessen their reliance on debt.

19. Serves as an economic barometer

Stock exchange indexes act as an economic barometer of an economy. By looking at the index one can judge the health of the business sector. The index is now at around 10,000 points which reflects the healthy trend prevailing in the economy.

20. Aid valuation of corporate

During mergers, acquisitions and takeovers, valuation of corporations presents a test. Since securities of company are traded on a stock exchange and quotations of share prices are made accessible by the stock exchange, valuation of corporations becomes at ease.

21. Facilitates expansion and diversification

Stock exchanges facilitate expansion and diversification of governments. They aid governments in issuing securities to tap the savings of investors. Funds so collected can be used for expansion and diversification activities.

Great Idea Change Concept - Today and Tomorrow.

22. Motivates better performance

Share prices of firms are influenced by their performance. Firms which report better performance on a sustained basis, find their share prices growing, whereas firms which are not performing well find their share prices decreasing. Since share prices are in the public domain and investors keep monitoring prices of securities, it serves as a motivation to companies to improve their performance.

Conclusion

Stock Exchange is a systematized market for the buy and sale of industrial and financial security. It is appropriate place where trading in securities is managed in systematic manner, for example, as per certain rules and regulations.

It performs many functions and offers functional services to investors and borrowing corporations. It is an investment intermediary and facilitates financial and industrial development of a nation.

Stock exchange is a systematized market for buying and selling business and other securities. Here, securities are bought and sold out as per certain well-defined rules and regulations. It provides a convenient and secured instrument or platform for transactions in different securities.

Such securities include shares and debentures issued by public businesses which are duly listed at the stock exchange and bonds and debentures issued by government, public corporations and municipal and port trust bodies.

Stock exchanges are crucial for the smooth and orderly functioning of business sector in a free market economy. A stock exchange need not be treated as a place for speculation or a gambling den. It should act as a place for safe and profitable investment, for this, effective control on the working of stock exchange is necessary. This will avoid misuse of this platform for excessive speculation, scams and other unwanted and anti-social activities.

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