What is a Stock Exchange and Why Do We Need Them?
Stock exchange refers to the collection of organized markets for the purchase and sale of financial and industrial security. Also known as stock market, a stock exchange connects stock buyers with stock sellers. Its a convenient place where trading and issuance of equities, bonds, and other securities takes place either through over-the-counter markets or formal exchanges in a systematic manner. The issuance and trading of equities at the stock exchange is done as per laid down rules and regulations.
Introduction to Stock Exchanges
A stock exchange is one of the most important components of a free-market economy as it provides companies with access to capital in exchange for a slice of ownership. Unlike an ordinary marketplace, the prominent figures in a stock exchange market are stock brokers. The professional buy and sell securities on behalf of investors. More often, brokers act as investment advisers to their clients.
There are several players who are associated with the stock exchange. They include; traders, stockbrokers, stock analysts, investment bankers, and portfolio managers. All these professionals have unique roles, but many of the roles are intertwined and depend on each other to make the market run effectively.
Some of the major stock exchanges in the world include; The New York Stock Exchange , NASDAQ, London Stock Exchange , SIX Swiss Exchange, Tokyo Stock Exchange , and many more.
The main features of a stock exchange
An organized market for securities
A stock exchange offers a platform where the government, semi-government, non-government ,and corporate bodies buy and sell securities.
Regulates trade in securities so as to ensure free and fair trade.
The stock exchange does not buy or sell any securities on its own account . Its primary role is to provide the necessary infrastructure and facilities for trade in securities.
Secondary market for securities
It deals with existing securities such as shares , debentures , bonds and other second-hand securities issued by the companies.
Recognized by a country's central government
The stock exchange is a properly organized market which is registered and recognized by a country's central government.
Operates within rules and regulations
The buying and selling of securities at the stock exchange is done as per rules and guidelines. Deviation from the rules and regulations is not tolerated at all.
Only listed securities can be traded
A stock exchange deals only in listed securities. Securities which do not feature in the official list of stock exchange cannot be traded in the stock exchange.
Stock market transactions are effected only through authorized brokers and members. Direct investors and outsiders do not get involved in trading activities at the stock exchange. Investors buy and sell securities through authorized brokers only.
Functions of a stock exchange
- Provides liquidity and marketability to existing securities.
- A stock exchange provides investors with a platform where they can buy and sell securities. It gives them an opportunity to invest money into securities and reconvert them into cash whenever required. The availability of a ready market for sale and purchase of securities increases the marketability and liquidity of shares.
- Stock exchange helps capital formation.
- Companies are able to raise funds through issuance of shares. This enables them to generate more capital hence contributing to a country's economic growth.
- Financial barometers
- A stock exchange is a financial barometer and a development indicator of the national economy of a country. Industrial growth and stability is reflected in the index of stock exchange.
- Provides a scope for healthy speculation.
- A stock market provides a scope for speculation whereby investors can reap huge profits from fluctuation of security prices. The fact that the price of securities is determined by demand and supply creates a healthy trend in the market. It prevents artificial scarcity.
- Promotes mobility of funds.
- Through buying and selling of securities, a stock exchange enables the availability of funds. This strengthens the money markets.
Generally, a stock exchange is an investment intermediary and facilitates economic and industrial development of a country.