Functions of Stock Exchanges
The stock market occupies a pivotal position in the financial system. It performs several economic functions and renders invaluable services to the investors, companies, and to the economy as a whole. They may be summarized as follows:
1. Liquidity and marketability of Securities:
Stock exchanges provide liquidity to securities since securities can be converted into cash at any time according to the discretion of the investor by selling them at the listed prices. They facilitate buying and selling of securities at listed prices by providing continuous marketability to the investors in respect of securities they hold or intend to hold. Thus, they create a ready outlet for dealing in securities.
2. Safety of Funds:
Stock exchanges ensure safety of funds invested because they have to function under strict rules and regulations and the bye laws are meant to ensure safety of investible funds. Over trading, illegitimate speculation etc., are prevented through carefully designed set of rules. This would strengthen the investor‗s confidence and promote larger investment.
3. Supply of Long term funds:
The Company is assured of long term availability of funds because the security is transacted one investor is substituted by another.
4. Flow of Capital to Profitable Ventures:
The profitability and popularity of companies are reflected in stock prices. The prices quoted indicate the relative profitability and performance of companies. Funds tend to be attracted towards securities of profitable companies and this facilitates the flow of capital into profitable channels.
5. Motivation for improved performance:
The performance of a company is reflected on the prices quoted in the stock market.
These prices are more visible in the eyes of the public. Stock market provides room for this price quotation for those securities listed by it. This public exposure makes a company conscious of its status in the market and it acts as a motivation to improve its performance further.
6. Promotion of Investment:
Stock exchanges mobilize the savings of the public and promote investment through capital formation. But for these stock exchanges, surplus funds available with individuals and institutions would not have gone for productive and remunerative ventures.
7. Reflection of Business Cycle:
The changing business conditions in the economy are immediately reflected on the stock
exchanges. Booms and depressions cane be identified through the dealings on the stock exchanges and suitable monetary and fiscal policies can be taken by the government. Thus a stock market portrays the prevailing economic situation instantly to all concerned so that suitable actions can be taken.
8. Marketing of New Issues:
If the new issues are listed, they are readily acceptable to the public, since, listing presupposes their evaluation by concerned stock exchange authorities. Costs of underwriting such issues would be less. Public response to such new issues would be relatively high. Thus, a stock market helps in the marketing of new issues also.
9. Miscellaneous Services:
Stock exchange supplies securities of different kinds with different maturities and yields.
It enables the investors to diversity their risks by a wider portfolio of investment. It also inculcates saving habits among the community and paves the ways for capital formation. It guides the investors in choosing securities by supplying him daily quotation of listed securities and by disclosing the trends of dealings on the stock exchange. It enables companies and the Government to raise resources by providing a ready market for their securities.