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.
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Frequently Asked Questions on Stock Exchange
Q1
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.
Q2
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)
Q3
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.
Q4
Q.4 What are some examples of a stock exchange?
Some examples of stock exchanges across the globe are:
- BSE
- NASDAQ
- LSE
- NYSE
FAQs
Stock exchanges are organized and regulated "places" (much trading today is virtual) where stocks and other types of securities are bought and sold. They play a crucial role in the financial system by providing a platform for companies to raise money by selling their stocks and bonds to the public.
What are the objectives and functions of the stock exchange? ›
The stock exchange in India serves as a market where financial instruments like stocks, bonds and commodities are traded. It is a platform where buyers and sellers come together to trade financial tools during specific hours of any business day while adhering to SEBI's well-defined guidelines.
What is the meaning function and importance of the stock market? ›
Stock markets play a crucial role in the economic landscape by facilitating the exchange of securities, which helps in capital formation and economic growth. They provide a structured platform where securities can be bought and sold, ensuring liquidity and enabling price discovery based on demand and supply.
What are the four functions of the stock exchange? ›
Functions of Stock Exchange are:a It provide liquidity and marketability to existing securities. b It determines the price of securities by force of demand and supply. c It ensure safety of transactions as the transactions carried out within an existing legal framework.
What do you mean by stock exchange? ›
A stock exchange is a centralised location where the shares of publicly traded companies are bought and sold. Stock exchanges differ from other exchanges because the tradable assets are limited to stocks, bonds and exchange traded products (ETPs).
What is the importance of a stock exchange? ›
A stock exchange helps companies raise capital or money by issuing equity shares to be sold to investors. The companies invest those funds back into their business, and investors, ideally, profit from their investment in those companies.
What is the key function of stock exchange? ›
The primary function of a stock market is creating a transparent and trustworthy marketplace for investors and companies, where businesses can trade their shares publicly to raise capital, and investors can create wealth.
What is stock market in simple words? ›
The stock market is where investors buy and sell shares of companies. It's a set of exchanges where companies issue shares and other securities for trading. It also includes over-the-counter (OTC) marketplaces where investors trade securities directly with each other (rather than through an exchange).
What is the main function of this market? ›
The market establishes the prices for goods and other services. These rates are determined by supply and demand. The sellers create supply, while buyers generate demand. Markets try to find some balance in price when supply and demand are in balance.
What is the true purpose of stock market? ›
The stock market helps companies raise money to fund operations by selling shares of stock, and it creates and sustains wealth for individual investors. Companies raise money on the stock market by selling ownership stakes to investors. These equity stakes are known as shares of stock.
These four stock control methods help businesses streamline their inventory management to achieve the perfect stock levels at all times.
- Stock count. Stock count, also known as stocktaking, is the process of counting inventory. ...
- Stock monitoring. ...
- Inventory planning. ...
- Track inventory.
For example, if an investor buys shares of a company's stock at $10 a share and the price of the stock subsequently rises to $15 a share, the investor can then realize a 50% profit on their investment by selling their shares.
Which of the following is a function of the stock market? ›
The purpose of a stock exchange is to facilitate the exchange of securities between buyers and sellers, thus providing a marketplace.
What are the features of the stock exchange? ›
Characteristics of the Stock Exchange
Regulated Trade in Securities: The exchange does not buy or sell bonds and shares on its own. Instead, brokers or exchange members conduct the trade on behalf of the company. Deals only in Listed Securities: Only listed securities recorded in the exchange office can be traded.
What is the function of the stock market? ›
Thus, the primary functions of stock market are facilitating a trustworthy financial marketplace for investors & businesses, where businesses trade their shares publicly to raise capital and make shareholders a part of their growth journey, whilst the exchange protects investors' interests by ensuring transparency, ...
Who controls the stock market? ›
Securities and Exchange Commission (SEC) | USAGov.
What are the objectives of the stock 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.
What are the main objective of National stock exchange? ›
The NSE was established with the specific objective of performing the following functions: Creating a nationwide trading establishment for equities, debt, and hybrid instruments. Providing equitable access to investors across the country via a good communication network.
What are the objectives of a stock trader? ›
Traders objectives include maximizing returns, generating income, speculating on opportunities, and developing trading skills. Risk management is a must.
What is the important role of stock exchange? ›
So, roles are the things people do, and importance is about how much those things matter. It's important to understand both – what each person is supposed to do and how valuable their contribution is – to make sure everyone works together well and achieves their goals.
