What are the Functions of Stock Market? | Espresso

Important Functions of Stock Market

Are you curious to start trading in the stock exchange? The stock exchange is an essential component of the capital market and the economy. It facilitates the secure trading of securities systematically. At the stock exchange, investors can buy and sell securities as per well-structured rules and regulations.

Published on 13 February 2023

The term securities refer to debentures and shares issued by a public company and bonds and debentures issued by government bodies, municipal, and public bodies.

A stock market can be physical or virtual. One of the top stock exchanges in India, BSE, also known as the Bombay Stock Exchange, is located at Dalal Street in Mumbai. In the past, trading was done here in person and then using telephones. However, with rapid advancements in technology, trading is now online. Participants can buy and sell securities from anywhere in the world.

As the stock exchange plays a major role in the world of finance and business, learning about its functions can be beneficial.

Top 9 Functions of Stock Market

The stock market and stock exchange have a very critical role to play in the trading of stocks & securities across the nation. They help companies to get access to capital needed run & expand their businesses & operations in order to provide their customers with superior quality products and services.

Stock markets play important role in the country's financial system of economy. Major functions of stock markets for investors as well as companies are:

1. Economic barometer

The stock exchange helps in measuring the state of the country’s economy. The pricing of shares fluctuates with every significant change in the country and economy. If the price rises, it indicates boom, whereas if the price falls, it indicates a recession cycle. The exchange is rightly recognised as the economic mirror or pulse of the economy since it reflects the economic condition of the country.

2. Pricing of securities

Based on demand and supply factors, the stock exchange helps to value securities. The securities offered by profitable companies focused on growth tend to have a higher value than other companies’ securities. Appropriate pricing of securities enables investors, creditors, and government organisations to perform their respective functions.

3. Safety of transactions

All companies listed on the stock exchange are well regulated. They must adhere to the legal framework given by the regulator for listing. As a result, it ensures transactional safety. In India, SEBI regulates the trading of securities.

4. Spreading of equity culture

Another function of the stock exchange is encouraging investors by providing information about equity market investments. In addition, it educates people about investment, highlights new issues, and regulates better trading practices.

5. Contributes to economic growth

The stock exchange facilitates buying and selling of securities of various listed companies. The process of buying and selling, or trading, involves continuous reinvestment and disinvestment, which provides an opportunity for capital formation. Therefore, it leads to economic growth.

6. Liquidity

The most vital function of the stock exchange is offering a secure and easy-to-use platform for trading securities. In addition, it instils confidence amongst the investors that they can convert their existing investments into cash. In other words, it provides opportunities for liquidity of the investment.
Also Read: What is Equity Investment?

7. Promotes the habits of savings and investment

The stock market exposes investors to attractive investment opportunities with various financial instruments on offer. With these opportunities, investors are motivated to increase their savings and invest in securities of the corporate sector instead of investing in unproductive assets like gold, silver, other metals, etc.

8. Better allocation of capital

The stocks of profit-making companies are actively traded on the stock exchange. The general public is not comfortable investing in securities of loss-making companies. As a result, it is easier for profit-making businesses to raise fresh capital from the equity market. The stock market enables investors to allocate their capital better and generate maximum profit earnings.

9. Provides scope for speculation

When securities are bought solely to profit after price increases to a target, it is known as speculation. Another function of the stock exchange is providing scope for speculation within the provisions of the law in a controlled and restricted manner. Through healthy speculation, the stock exchange ensures the demand, supply, and liquidity of securities. 

To Sum it Up

These are the top functions of the stock market that you must know. The stock market plays a crucial role in a country’s economy and contributes to the country’s economic growth. It also helps businesses raise capital for their operations and growth and allows investors to earn profits by trading in securities.

Chandresh Khona

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