Important functions of stock exchanges
2018-07-07, By: System Administrator
There are certain important functions discussed while talking about stock exchange.
1. To go for fair price: We get fair prices from stock exchanges for securities traded on them. Prices of securities are determined through continuous trading activity in stocks and debentures.
2. Industrial financing: A countryís industrial development is due to the availability of capital. Capital required for investment in industries comes from stock exchanges.
3. Pricing of Securities: Demand and supply factors help to value the securities of the stock market. The growth oriented companies with securities of profitable are taken as high value. For investors this valuation of securities is very useful.
4. Regulation of the corporate sector: Documents of listed companies are mandatory to be submitted in the stock exchange like the annual returns, and provide information regarding plans to merge with or acquire other companies.
5. Optimum resource allocation: Stock exchanges permit for maximum optimum allocation of scare capital resources. Capital is the most essential ingredient needed for businesses. Stock exchanges helps in allocation of capital to companies which are performing well and have potential for profitable growth in the future.
6. Investor education: Stock exchanges give vital information to the investors in their web sites, through advertisement in print media regarding the doís and doníts towards investing and encourage conduct of investor awareness programs. This enables investors both in the urban as well in rural areas to become aware of stock market investment and make prudent investment decisions.
7. Mobilization of savings: Stock exchanges play an important role in mobilizing savings of individuals and institutions. Savings so mobilized can be utilized to invest in various projects boosting industrial and economic development of a country.
8. Protection of investors: Companies that are listed in the stock exchanges have to follow certain rules and regulations. They have to submit various documents and returns and provide information regarding any important activity they plan to undertake. Stock exchanges have formulated regulations to ensure safety of investorís funds.
9. New venture creation: Stock exchanges enable creation of new ventures. Any new venture requires financing. Stock exchanges are an important avenue for new ventures to raise capital for meeting their capital needs. The stock exchange has aided new venture creation by enabling promoters to raise the required funds. For e.g. the phenomenal growth of Reliance can be attributed to the public issues of shares on a large scale which provided the company large funds to employ in large scale projects.
10. Meeting financial needs of government: The government requires funds to undertake various projects and government companies need funds for expansion, diversification etc. The Central and State governments, municipal corporations, state financial corporations etc have raised crores through the issue of shares, bonds etc.
11. Continuous market for securities: The Investors are able to invest in good securities and in case of any risk, it enables people to switch over from one security to another. So stock markets provides a ready and continuous opportunities for securities.
12. Evaluation of securities: It the stock exchange, the prices of securities clearly indicate the performance of the companies. It integrates the demand and supply of securities in an effective manner. It also clearly indicates the stability of companies. Thus, investors are in a better position to take stock of the position and invest according to their requirements.
13. Mobilizes savings: The savings of the public are mobilized through mutual funds, investments trusts and by various other securities. Even those who cannot afford to invest in huge amount of securities are provided opportunities by mutual funds and investment trusts.
14. Healthy speculation: The stock exchange encourages healthy speculation and provides opportunities to shrewd businessmen to speculate and reap rich profits from fluctuations in security prices. The price of security is based on supply and demand position. It creates a healthy trend in the market. Any artificial scarcity is prevented due to the rules and regulations of the market.
15. Mobility of funds: The stock exchange enables both the investors and the companies to sell or buy securities and thereby enable the availability of funds. By this, the money market also is strengthened as even short-term funds are available. The banks also provide funds for dealing in the stock exchanges.
16. Stock exchange Protect investors: As only genuine companies are listed and the activities of the stock exchange are controlled, the funds of the investors are very much protected.
17. Stock exchange helps Capital formation: Stock exchange plays an active role in the capital formation in the country. Companies are able to raise funds either by issuing more shares through rights shares or bonus shares. But when a company wants to go in for diversification, they can issue the shares and raise more funds. Thus, they are able to generate more capital and this promotes economic growth in the country.
18. Proper Canalization of Capital: Stock exchange directs the flow of savings into the most productive and profitable channels.
19. Regulation of Company management: The companies, which want to get their securities listed in the stock exchange, should have to follow certain rules and fulfill certain conditions.
Thus stock exchanges safeguard the interest of the investing public and also regulate company management. 20. Barometer of Business Progress: Stock exchanges function as a barometer of the business conditions in the country. Booms and depressions are reflected by the index of prices of various securities maintained by the stock exchange. By analyzing the ups and downs of the market quotations, the causes for the changes in the business climate can be ascertained.