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What is stock exchange? Explain the functions of the stock exchange.

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A stock exchange is an institution which provides a platform for buying and selling of existing securities. According to Securities Contracts (Regulation) Act, 1956, Stock exchange means,

“anybody of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying and selling or dealing in securities”.

Functions of Stock Exchange: 

Following are some of the important functions of a stock exchange.

1. Providing liquidity and marketability to existing securities: The basic function of a stock exchange is the creation of a continuous market where securities are bought and sold. It gives investors the chance to disinvest and reinvest. This provides both liquidity and easy marketability to already existing securities in the market. 

2. Pricing of securities: Share prices in a stock exchange are determined by the forces of demand and supply. A stock exchange is a mechanism of constant valuation through which the prices of securities are determined. Such a valuation provides important instant information to both buyers and sellers in the market. 

3. Safety of transaction: The membership of a stock exchange is well regulated and its dealings are well defined according to the existing legal framework. This ensures that their vesting public gets a safe and fair deal on the market. 

4. Contributes to economic growth: Stock exchange is a market in which existing securities are resold or traded. Through this process of disinvestment and reinvestment savings get channalised into the most productive investment avenues. This leads to capital formation and economic growth. 

5. Spreading of equity cult: The stock exchange can play a vital role in ensuring wider share ownership by regulating new issues, better trading practices and taking effective steps in educating the public about investments. 

6. Providing scope for speculation: The stock exchange provides sufficient scope within the provisions of law for speculative activity in a restricted and controlled manner. It is generally adopted that a certain degree of healthy speculation is necessary to ensure liquidity and price continuity to the stock market. Thus, “efficient functioning of a stock exchange creates a positive environment among investors and leads to the growth of primary market for new issues.

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