Stock Exchange: meaning, functions, objectives, importance, features (2024)

Meaning of Stock Exchange

A stock exchange is an important factor in the capital market. It is a secure place where trading is done in a systematic way. Here, the securities are bought and sold as per well-structured rules and regulations. Securities mentioned here includes debenture and share issued by a public company that is correctly listed at the stock exchange, debenture and bonds issued by the government bodies, municipal and public bodies.

Stock Exchange: meaning, functions, objectives, importance, features (1)

Typically bonds are traded Over-the-Counter (OTC), but a few corporate bonds are sold in a stock exchange. It can enforce rules and regulation on the brokers and firms that are enrolled with them. In other words, a stock exchange is a forum where securities like bonds and stocks are purchased and traded. This can be both an online trading platform and offline (physical location).

Functions of Stock Exchange

Following are some of the most important functions that are performed by stock exchange:

  1. Role of an Economic Barometer: Stock exchange serves as an economic barometer that is indicative of the state of the economy. It records all the major and minor changes in the share prices. It is rightly said to be the pulse of the economy, which reflects the state of the economy.
  2. Valuation of Securities: Stock market helps in the valuation of securities based on the factors of supply and demand. The securities offered by companies that are profitable and growth-oriented tend to be valued higher. Valuation of securities helps creditors, investors and government in performing their respective functions.
  3. Transactional Safety: Transactional safety is ensured as the securities that are traded in the stock exchange are listed, and the listing of securities is done after verifying the company’s position. All companies listed have to adhere to the rules and regulations as laid out by the governing body.
  4. Contributor to Economic Growth: Stock exchange offers a platform for trading of securities of the various companies. This process of trading involves continuous disinvestment and reinvestment, which offers opportunities for capital formation and subsequently, growth of the economy.
  5. Making the public aware of equity investment: Stock exchange helps in providing information about investing in equity markets and by rolling out new issues to encourage people to invest in securities.
  6. Offers scope for speculation: By permitting healthy speculation of the traded securities, the stock exchange ensures demand and supply of securities and liquidity.
  7. Facilitates liquidity: The most important role of the stock exchange is in ensuring a ready platform for the sale and purchase of securities. This gives investors the confidence that the existing investments can be converted into cash, or in other words, stock exchange offers liquidity in terms of investment.
  8. Better Capital Allocation: Profit-making companies will have their shares traded actively, and so such companies are able to raise fresh capital from the equity market. Stock market helps in better allocation of capital for the investors so that maximum profit can be earned.
  9. Encourages investment and savings: Stock market serves as an important source of investment in various securities which offer greater returns. Investing in the stock market makes for a better investment option than gold and silver.
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Features of Stock Exchange:

  • A market for securities- It is a wholesome market where securities of government, corporate companies, semi-government companies are bought and sold.
  • Second-hand securities- It associates with bonds, shares that have already been announced by the company once previously.
  • Regulate trade in securities- The exchange does not sell and buy bonds and shares on its own account. The broker or exchange members do the trade on the company’s behalf.
  • Dealings only in registered securities- Only listed securities recorded in the exchange office can be traded.
  • Transaction- Only through authorised brokers and members the transaction for securities can be made.
  • Recognition- It requires to be recognised by the central government.
  • Measuring device- It develops and indicates the growth and security of a business in the index of a stock exchange.
  • Operates as per rules– All the security dealings at the stock exchange are controlled by exchange rules and regulations and SEBI guidelines.

The above mentioned concept ‘What is a stock exchange?’ is elucidated in detail for Commerce students. To know more, stay tuned to BYJU’S.

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Frequently Asked Questions on Stock Exchange

Q1

Q.1 Why is the stock exchange important?

Stock markets help companies to trade publicly in order to raise capital. It acts as a platform for sale and purchase of securities.

Q2

Q.2 What are the 4 types of stocks?

Following are the 4 types of stock:

  1. Preferred stock
  2. Common stock
  3. Growth stock
  4. Yield stock (Dividend)

Q3

Q.3 What is the purpose of the stock exchange?

The purpose of a stock exchange is to help in capital formation and act as intermediary between companies and investors by providing a common platform for exchange.

Q4

Q.4 What are some examples of a stock exchange?

Some examples of stock exchanges across the globe are:

  1. BSE
  2. NASDAQ
  3. LSE
  4. NYSE
Stock Exchange: meaning, functions, objectives, importance, features (2024)

FAQs

What are the objectives and functions of the stock exchange? ›

Offers scope for speculation: By permitting healthy speculation of the traded securities, the stock exchange ensures demand and supply of securities and liquidity. Facilitates liquidity: The most important role of the stock exchange is in ensuring a ready platform for the sale and purchase of securities.

What is the meaning and features of stock exchange? ›

The stock exchange in India serves as a market where financial instruments like stocks, bonds and commodities are traded. It is a platform where buyers and sellers come together to trade financial tools during specific hours of any business day while adhering to SEBI's well-defined guidelines.

What are the 4 functions of the stock exchange? ›

The functions of stock exchange include bringing in foreign investments, managing and building the economy, raising capital, bringing in investments and maintaining liquidity.

What is the meaning function and importance of the stock market? ›

The stock market provides liquidity to investors by offering a platform where they can buy and sell stocks easily. This liquidity is important as it allows investors to convert their investments into cash relatively quickly.

What is the stock exchange answer in one sentence? ›

A stock exchange is a place where people buy and sell stocks and shares. The stock exchange is also the trading activity that goes on there and the trading organization itself. The shortage of good stock has kept some investors away from the stock exchange.

What is stock market in simple words? ›

The stock market is where investors buy and sell shares of companies. It's a set of exchanges where companies issue shares and other securities for trading. It also includes over-the-counter (OTC) marketplaces where investors trade securities directly with each other (rather than through an exchange).

What is stock and its features? ›

Common stocks can be defined as securities that represent individuals' ownership in a said corporation and their claim on the venture's accrued profits. Such stock option offers individuals a power to elect the company's board of directors and further extends them voting rights to formulate corporate policies.

What is the function of the exchange? ›

The core function of an exchange is to ensure fair and orderly trading and the efficient dissemination of price information for any securities trading on that exchange. Exchanges give companies, governments, and other groups a platform from which to sell securities to the investing public.

What is the primary purpose of the stock market? ›

First, it helps companies raise money often referred to as capital from the public by offering shares for sale, which can be used to fund and expand their business. Secondly, it gives an investor, who purchases those shares, an opportunity to have a share in the company's profits.

What is the key role of stock exchange? ›

Stock exchanges are organized and regulated "places" (much trading today is virtual) where stocks and other types of securities are bought and sold. They play a crucial role in the financial system by providing a platform for companies to raise money by selling their stocks and bonds to the public.

What are the four important parts of a stock? ›

Stocks contain four essential parts: a major flavoring ingredient, liquid, aromatics, and mirepoix. There are many types of stock, including white stock, brown stock, fumet, court bouillon, glace, remouillage, bouillon, jus, and vegetable stock.

What are the functions of specialists on a stock exchange? ›

A specialist allows for the trading of a specific stock by serving four roles: auctioneer of stocks to investors, agent for investors in stock trades, catalyst to instigate trades from interested parties, and principal who buys, holds, and sells shares of stock with their own capital when necessary.

What is a stock exchange and its features? ›

It is a market hosted by an institute or any such government body where shares, stocks, debentures, bonds, futures, options, etc are traded. A stock exchange is a meeting place for buyers and sellers. These can be brokers, agents, individuals. The price of the commodity is decided by the rules of demand and supply.

What is the main function of this market? ›

A market is where buyers and sellers can meet to facilitate the exchange or transaction of goods and services. Markets can be physical, like a retail outlet, or virtual, like an e-retailer.

How does the stock exchange work? ›

Stock exchanges are secondary markets where existing shareholders can transact with potential buyers. Corporations listed on stock markets do not commonly buy and sell their shares but may engage in stock buybacks or issue new shares; however, these transactions occur outside of the framework of the exchange.

What are the three objectives of the National stock exchange? ›

Functions of NSE

Creating a nationwide trading establishment for equities, debt, and hybrid instruments. Providing equitable access to investors across the country via a good communication network. Using electronic trading systems provides investors with a fair, efficient, and transparent securities market.

What is the purpose of the stock exchange? ›

A stock exchange brings companies and investors together. A stock exchange helps companies raise capital or money by issuing equity shares to be sold to investors. The companies invest those funds back into their business, and investors, ideally, profit from their investment in those companies.

What is the objective of stock market trading? ›

The primary goal of stock traders is to buy and sell shares in various companies. They intend to gain profit through short-term gains via stock price fluctuations either for their clients or for themselves.

What are the functions of the securities market? ›

Securities Market is thus a part of the Capital Market. The primary function of the securities market is to enable allocation of savings from investors to those who need it. This is done when investors make investments in securities of companies / entities which are in need of funds.

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