Define a stock exchange and explain fully its economic functions.
Stock exchange is defined as an association, organization or body of individuals, whether incorporated or not, established-for the purpose of assisting, regulating and controlling business of buying, selling and dealing in securities. All stock exchanges function according to the provisions of the Securities Contracts (Regulation) Act, 1956.
Stock exchange is an organized market where all transactions take place as per the rules and bye-laws of the concerned stock exchange. In a stock exchange, securities such as shares, debentures, bonds etc are bought and sold issued by central, state and local governments, port trusts, joint stock companies, municipalities, public corporations and utility concerns. Transactions in a stock exchange occur between members or their authorized agents on behalf of the investors. There are fourteen stock exchanges in India.
Economic Functions of Stock Exchange: The functions are divided into two types from the economic point of view-primary functions and secondary functions.
Primary Functions:
Mobilizing surplus savings: It forms an important part of capital market of a country. Industrial and commercial undertakings can make use of the savings provided by stock exchanges from all parts of the country with a view to meet their financial requirements.
Mobility of capital: It provides capital mobility and sound investment because savings invested in securities are converted into cash in order to reinvest in other securities. It is possible because of the continuous and open market provided by stock exchanges for securities.
Contribution to capital formation: Investors get proper information regarding where and how to invest their savings in order to fetch a fair return with the help of stock markets. People start saving as soon as they come to know about investment avenues.
Marketability and price continuity: As buying and selling of securities take place conveniently in stock exchanges, it provides for easy marketability of securities. Continuity in the dealings is also there because buying and selling takes place on a regular basis.
Facilitates resource allocation: Stock exchange provides for mobility of funds i.e. movement or flow of funds in the economy as a whole. People invest their savings in those projects of the industries which have proper growth potentials. It is possible to allocate the financial resources of the economy reasonably.
Secondary Functions
Easy liquidity: Stock -markets provide assurance of liquidity of the investment i.e. easy conversion into cash, adequate return on investment etc to the investors. After knowing the liquidity, investors easily subscribe new shares.
Full information regarding listed companies: Stock exchanges publish the information about companies listed with them in the form of ‘Official Year Book’. Investors can make use of such information in order to make investment decisions.
Accurate and continuous report regarding sales: The information regarding the securities traded reach day and prices at which deals are finalized is supplied to newspapers and other media along with prices of essential securities which ruled at closing time. The regular record maintained by stock exchanges help in ascertaining the trend of price fluctuations and promoting healthy speculation.
Safeguards to investors: According to the rules and regulations, operations are controlled and only members are allowed to deal in securities and make transactions. Investors’ interests are safeguarded against dishonesty or malpractices because members have to carry on their business as per the rules.
Safety in investment and equity in dealings : Stock exchange in order to protect the investors from being cheated, satisfies itself about the soundness of the company. Every state and industry gets a fair share of the investor’s attention for investment of their savings.
