Functions of Stock Exchange

Functions of Stock Exchange

The various functions of a Stock Exchange are explained below.

The various functions of a Stock Exchange are explained below.

1. Ready and Continuous Market

Stock Exchange is, in fact, a market for existing securities. If an investor wants to sell his securities, he can easily and quickly dispose them off on a stock exchange. In other words, he can convert his shares into cash and with the same ease he can convert his cash into securities. This easy marketability of securities increases their liquidity (conversion of securities into cash easily and quickly) and consequently raises their value.

2. Correct Evaluation of Securities

The prices at which securities are bought and sold are recorded and made public. These prices are called “market quotations”. One can easily evaluate the worth of one’s securities on the basis of these quotations. The lender can easily assess the worth of security offered for loan.

3. Protection to Investors

All dealings in a stock exchange are in accordance with well-defined rules and regulations. For example, brokers cannot charge higher rate of commission for their services. Any malpractice will be severely punished. Thus stock exchange provides reasonable measure of safety and fair dealing in buying and selling of securities.

4. Proper Chanalisation of Capital

People like to invest in the shares of such companies which yield good profits. The savings of individuals are directed towards promising companies which declare good dividends over a period of time. But for the stock exchanges, these savings are likely to be wasted on the shares of unprofitable units.

5. Aid to Capital Formation

The publicity which the stock exchange gives to various industrial securities and their prices and the facilities provided by it for their purchase and sale induce people to save and invest. Stock exchanges thus ensure a steady flow of capital into industry and assists industrial development.

6. Facilities for Speculation

Speculation is an integral part of stock exchange operations. As a result of speculation, demand for and supply of securities are equalized. Similarly, price movements are rendered smoothly.

7. Seasoning of Securities

Speculators and underwriters hold for a temporary period, securities issued by new companies. They unlock them when the market is prepared to absorb the new issues.

8. Clearing House of Business Information

Listed companies are required to furnish all important information relating to capital management, dividend distribution etc, and forward copies of financial statements, annual reports etc, to the stock exchange. They publish every year, books detailing the financial position of companies. Thus, it gives vital information to the investing public for deciding on investment.