Stock Market And Its Functions

Definition

It is a place where shares of pubic listed companies are traded. The primary market is where companies float shares to the general public in an initial public offering (IPO) to raise capital.

Once new securities have been sold in the primary market, they are traded in the secondary market where one investor buys shares from another investor at the prevailing market price or at whatever price both the buyer and seller agree upon. The secondary market or the stock exchanges are regulated by the regulatory authority. In India, the secondary and primary markets are governed by the Security and Exchange Board of India (SEBI).

A stock exchange facilitates stock brokers to trade company stocks and other securities. A stock may be bought or sold only if it is listed on an exchange. Thus, it is the meeting place of the stock buyers and sellers. India's premier stock exchanges are the Bombay Stock Exchange and the National Stock Exchange.

Functions Of Stock Market

1. Providing liquidity and Marketability to Existing Securities: Stock Exchange provides a ready and continuous market for buying and selling securities. It provides a platform where shares can be sold and bought by buyers and sellers.

2. Pricing of Securities: Based on the forces of demand & supply, Stock Exchange helps in putting a value on the securities which provide instant data to both buyers and sellers and thus helps in the pricing of securities.

3. Safety of Transaction: All participants associated with a stock exchange are well regulated, and are required to work within the legal framework given by the regulator. Such a system ensures the safety of transactions. In India, all trading is regulated by SEBI.

4. Contributes to Economic Growth: People get a chance to buy and sell their shares, letting them invest money. The stock exchange provides a platform by which savings get channelized into the most productive investment proposals, which leads to capital formation & economic growth.

5. Spreading of Equity Culture: Stock exchanges have extensive information on the listed companies, which is further available to the public. This data helps in educating the public about investments in securities which leads to the spreading of wider ownership of shares.

6. Providing Scope for Speculation: Securities, when purchased solely with a view of gaining profit through price movement to a target is called speculation. Stock exchanges provide scope within the provisions of law for speculating in a restricted and controlled manner.

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