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Stock exchanges are the important ingredient of the capital market. They are the citadel of
capitaland fortress of finance. A stock Exchange is also called as a stock market. Stocks and
shares fall intotwo basic categories: shares, or equities, which give the buyer part- ownership of
the company inwhich he or she has invested; and stocks, or bonds which lend money to the
government or largecompany without giving a right of ownership. Both stocks and shares are
called as Securities. Themarket where existing securities are traded is referred to as the stock
market or secondary market.In brief, stock exchanges constitute a market where securities
issued by the central and stategovernments, public bodies and joint stock companies are
traded.
Definition
As per the Securities Contracts Regulation Act, 1956 a stock exchange has been defined as
follows:
It is an association, organization or body of individuals whether incorporated or not,
established for the purpose of assisting, regulating and controlling business in buying, selling
and dealing in securities.
Functions /Services of Stock Exchange
1.Liquidity and Marketability of SecuritiesStock exchanges provide liquidity to securities since
securities can be converted intocash at any time according to the discretion of the investor by
selling them at the listedprices. They facilitate buying and selling of securities at listed prices by
providing continuousmarketability to the investors in respect of securities they hold or intend
to hold. Thus, theycreate a ready outlet for dealing in securities.
2.Safety of fundsStock exchanges ensure safety of funds because they have to function under
strict rulesand 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 investors confidence and promote larger investment.
3.Flow of Capital to Profitable VenturesThe profitability and popularity of companies are
reflected in stock prices. The pricesquote indicate the relative profitability and performance of
companies. Funds tend to beattracted towards securities of profitable companies and this
facilitates the flow of capitalinto profitable channels.
4.Motivation for Improved PerformanceThe 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. This public
exposure makes acompany conscious of its status in the market and it acts as a motivation to
improve itsperformance further.
5.Promotion of InvestmentStock exchanges mobilise the savings of the public and promote
investment throughcapital formation. But for these stock exchanges, surplus funds available
with individuals andinstitutions would not have gone for productive and remunerative
ventures.
6.Reflection of Business CycleThe changing business conditions in the economy are immediately
reflected on thestock exchanges. Booms and depressions can be identified through the dealings
of the stockexchanges and suitable monetary and fiscal policies can be taken by
the government.