A stock exchange is a highly organsied financial market where shares, debentures and bonds can be bought or sold. Its main function is to create a link between the buyers and sellers of securities so that investments can change hands in the quickest, cheapest and fairest manner.
It is an organised market where second hand securities are bought and sold for investment and speculation. The securities traded on a stock exchange consist of shares, debentures and bonds issued by companies, corporations and Government bodies to the public.
Under the Securities Contract (Regulation) Act, 1956, the term stock exchange has been defined as “an association, organisation 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.”
Thus, a stock exchange is a market where dealings in the listed securities are made by the members of the exchange on their own behalf or on behalf of others.
It is an association of persons organised to provide facilities for the purchase and sale of listed securities. Listed securities are those shares, debentures, bonds, etc. which are included in the trading list of a recognized stock exchange.
In order to get its securities listed, a company has to make an application to the concerned stock exchange and comply with the prescribed formalities and rules. The stock exchange should be differentiated from the produce exchange which is an organised market in commodities.
Features of Stock Exchange
The main features of a stock exchange are as follows:
(a) An organisation in the form of an association or a company.
(b) A governing board to supervise and regulate activities.
(c) A framework of rules and regulations.
(d) A common meeting place for buyers and sellers, and
(e) Brokers to serve as a link between the buyers and sellers.
Functions of Stock Exchange
1. Ready market:
A stock exchange provides a ready and regular market where investors can easily buy and sell securities. It provides a common meeting place where people can convert their money into securities and securities into money.
Buying and selling of securities is confined to one particular place and the investors are saved the trouble of going to different places to buy or sell securities.
2. Price determination:
A stock exchange helps in determining the prices for various securities. Continuous purchase and sale of securities on a stock exchange lead to the appraisal of their prices. Regular dealings reduce wide fluctuations in prices.
The prices at which dealings take place are recorded as quotations. These quotations are published in newspapers. The investors can know the market value of their securities from these quotations.
3. Protection of investors:
A stock exchange functions strictly according to established rules and regulations. These rules and regulations provide a check on overtrading in securities and manipulation of prices. The Government, too; exercises supervision and control over a stock exchange.
The managements of companies whose securities are listed have to submit reports to the stock exchange authorities. In this way, a stock exchange serves as a caretaker of investors’ money. Investors can buy and sell securities with confidence and without fear of being exploited.
4. Capital Formation:
A stock exchange induces people to save and invest in securities by holding out prospects of increased earnings and capital appreciation.
There is regular publicity of its operations which encourages saving and investment. People know that when they need money, they can easily sell their securities in a stock exchange.
Therefore, they are more willing to invest their savings in securities. Thus, a stock exchange serves as an instrument of capital formation by mobilising public savings.
5. Channel for investment:
A stock exchange channelizes the investible funds in more productive industries. A company with better performance and prospects has no difficulty in raising its capital.
A stock exchange informs investors which way the investment wind is blowing. By directing the flow of capital into worthwhile projects, it gives an impetus to the economic development of the country.
6. Economic Barometer:
A stock exchange serves as a reliable barometer of a country’s economic situation. It reflects changes taking place in the country’s economy. Price trends on stock exchange indicate trade cycles i.e. boom, recession, depression, recovery, etc.
7. Regulation of company management:
Stock exchanges frame their rules and regulations. Any company which wants to get its securities listed has to submit to these rules and regulations. Thus, stock exchanges exercise a healthy influence on the working and management of companies.
8. Clearing House of information:
A stock exchange is a medium of useful business information. Many stock exchanges publish directories which provide data on the corporate sector. Such information is very useful in business forecasting and general business trends.
In the words of late Shri. C.D. Deshmukh, “the economic services which a well constituted and efficiently run securities market can render to a country with a large private sector, operating under the normal incentives and impulses of private enterprise are considerable.
In the first place, it is only an organised securities market which can provide sufficient marketability and price continuity for shares so necessary for the needs of investors.
Secondly, it is only such a market that can provide a reasonable measure of safety and fair dealing in the buying and selling of securities.
Thirdly, through the interplay of demand for and supply of securities, a properly organised stock exchange assists in a reasonably correct evaluation of securities in terms of their real worth.
Lastly, through such evaluation of securities, the stock exchange helps in the orderly flow of savings as between different types of competitive investments.”
Services of Stock Exchange
A stock exchange renders valuable services to the corporate sector, investors and the community.
Services to corporate sector
1. Wider market:
A stock exchange serves as a sales counter for new securities. A new company finds it easier to sell its securities if they are listed on a stock exchange. Securities purchased and sold on a stock exchange cover a wide market.
Therefore, a company can raise a large amount of capital from different types of investors.
Investors know that a stock exchange makes a close scrutiny of company before listing its securities. Therefore, they have greater faith in such a company. Listing adds to the goodwill and credit-standing of a company.
3. High share prices:
Listed securities enjoy greater demand; therefore, their market value is higher. This is profitable for a company engaged in bargains concerning amalgamation, absorption, etc. In fact, the corporate sector could not have attained its present position in the absence of stock exchanges.
4. Price stability:
Stock exchange helps to minimise fluctuations in the prices of securities through the forces of demand and supply. It provides facilities for investment and speculation in company shares and debentures.
Services to Investors
1. Liquidity of investment:
A stock exchange provides a ready market where securities can easily be converted into cash. Easy marketability makes investment in securities liquid.
A stock exchange ensures safe and fair dealings in securities. This is because the management of a stock exchange exercises supervision and control over the activities of dealers in securities. Transactions are carried out under the prescribed rules and regulations.
3. Loan Facility:
The securities dealt in on a stock exchange are negotiable. They can be used as a collateral security for raising loans.
Price quotations on a stock exchange are reported in newspapers. An investor can find out the market value of his securities. From price trends, he can make a rational choice among securities. It becomes easier for him to decide when to sell his securities or to invest his surplus money in securities.
5. Investment guide:
Investors can decide about purchase and sale of securities on the basis of stock exchange quotations. A stock exchange, therefore, serves as a friend and guide to investors.
6. Better Bargains:
On a stock exchange, investors buy and sell securities through professionals. With the advice and help of these professionals, even a lay investor can make profitable investments.
7. Less Risk:
A stock exchange does not list any security unless it is satisfied about its worth. Such security before listing creates a sense of confidence among investors. They have no fear of risk while trading in listed securities.
Services to the Community
1. Capital formation:
Stock exchanges promote the habit of saving and investment among people. They help to mobilise public savings which may otherwise remain idle and thereby facilitate the process of economic development in the country.
2. Channel for profitable investment:
On a stock exchange, securities are under constant and close evaluation by the professional operators. Such continuous assessment of the worth of securities helps investors in deciding which securities to buy and which to sell.
In this way, a stock exchange makes a rational allocation of investible funds among different projects. The country’s financial resources are channelized into productive investments.
3. Public finance:
In a developing country like India, the Government requires a large amount of money for various schemes of socio-economic development. Government agencies can sell bonds more easily through stock exchanges.
4. Economic Mirror:
Stock exchanges faithfully reflect the economic, social and political conditions in the country. This is because every major change in such conditions has an effect on share prices. That is why a stock exchange is known as the pulse of the company.