Definition Of Stock Exchange: According to the Securities Contracts (Regulation) Act of 1956, the term ‘stock exchange’ is defined as “An association, organization or body of individuals, whether incorporated or not established for the purpose of assisting, regulating and controlling of business in buying, selling and dealing in securities.”
Husband and Dockerary have defined stock exchange as: “Stock exchanges are privately organized markets which are used to facilitate trading in securities.”
Stock Exchange performs various important functions discussed as follows:
(i) Mobilisation of Savings: Stock markets are organized and regulated markets that protect the interests of the investors. It obtains surplus funds (savings) from individual households private and public sector units etc. and channelizes them in the proper direction. It thus provides a ready market for buying and selling securities.
(ii) Capital Formation: Investors in securities are attracted due to good returns on investments and capital appreciation. The stock exchanges encourage investors to invest in the primary and secondary stock markets for investing in stock markets, investors need to save money. Savings lead to investment in shares and other securities. Such investments lead to capital formation.
(iii) Pricing of Securities: The price of the securities are sold in the stock markets is based on demand and supply forces listed securities get prestige and reputation. When the prices of the shares go up constantly, their security value increases. The valuation of securities is useful to investors, the government, and creditors. The investors thus can gauge their investment worth and the creditors too can estimate the creditworthiness of a company.
(iv) Economic Barometer: A stock exchange is a reliable barometer to measure the economic condition of a country. They encourage investors to invest and help companies to generate long-term funds thus promoting industrial development. The rise or fall in the share prices indicates the boom or recession cycle of the economy. The stock exchange is the pulse of the economy and the mirror that reflects the country’s economic status.
(v) Protecting Interest of Investors: In the stock markets, only the listed securities are traded. The stock exchanges protect the interests of the investors through the strict enforcement of their rules and regulations. The securities Control (Regulation) Act 1956, provides rules for the functioning, licensing, and controlling speculations of stock exchanges. The SEBI also plays an important role in monitoring stock exchanges thus protect the interests of the investors by regulating intermediaries, monitoring speculation, and making the investors aware of their rights through IEPF, etc.
(vi) Liquidity: The stock exchange facilitates liquidity by providing a ready market for the sale and purchase of securities. It provides marketability along with liquidity to investments in corporate enterprises. Because of stock exchange investors can convert a long-term investment into short-term and medium-term as it provides a two-way outlet by transforming money into an investment and vice versa without much delay.
(vii) Better Allocation of Capital: The stock exchange regulates and controls the flow of investment from unproductive to productive, uneconomic to economic, unprofitable to profitable enterprises. Thus, savings of the people are channelized into industry yielding good returns, and under utilization of capital is avoided.
(viii) Contributes to Economic Growth: The stock exchange help in the process of rapid economic development by speeding up the process of capital formation as well as resource mobilization. It helps in raising medium as well as long-term capital for the development and expansion of the companies. The resource of the economy flows from one company to another. This leads to capital formation as well as economic growth.
(ix) Providing Scope for Speculation: Stock Exchanges’ like any other market provides a mechanism for evaluating the prices of securities through the basic law of demand and supply. Stock Exchange prices help to check the real worth of the securities in the market and thus permit healthy speculation of securities.
(x) Promotes the Habit of Savings and Investment: The stock market offers attractive opportunities for investment in various securities by obtaining funds from surplus units such as households, individuals, public sector units, central government, etc, and channelizing these funds for productive purposes.
