Page 107 - DCOM304_INDIAN_FINANCIAL_SYSTEM

Indian Financial System

Notes exchange. There is little risk of loss on account of non-payment or nondelivery. Securities
and Exchange Board of India (SEBI) also regulates the business in stock exchanges in India
and the working of the stock brokers. Not only that, a stock exchange allows trading only
in securities that have been listed with it; and for listing any security, it satisfies itself
about the genuineness and soundness of the company and provides for disclosure of
certain information on regular basis. Though this may not guarantee the soundness and
profitability of the company, it does provide some assurance on their genuineness and
enables them to keep track of their progress.
4. Helps in mobilisation of savings and capital formation: Efficient functioning of stock
market creates a conducive climate for an active and growing primary market. Good
performance and outlook for shares in the stock exchanges imparts buoyancy to the new
issue market, which helps in mobilising savings for investment in industrial and
commercial establishments. Not only that, the stock exchanges provide liquidity and
profitability to dealings and investments in shares and debentures. It also educates people
on where and how to invest their savings to get a fair return. This encourages the habit of
saving, investment and risk-taking among the common people. Thus it helps mobilising
surplus savings for investment in corporate and government securities and contributes to
capital formation.
5. Barometer of economic and business conditions: Stock exchanges reflect the changing
conditions of economic health of a country, as the shares prices are highly sensitive to
changing economic, social and political conditions. It is observed that during the periods
of economic prosperity, the share prices tend to rise. Conversely, prices tend to fall when
there is economic stagnation and the business activities slow down as a result of
depressions. Thus, the intensity of trading at stock exchanges and the corresponding rise
on fall in the prices of securities reflects the investors' assessment of the economic and
business conditions in a country, and acts as the barometer which indicates the general
conditions of the atmosphere of business.
6. Better Allocation of funds: As a result of stock market transactions, funds flow from the
less profitable to more profitable enterprises and they avail of the greater potential for
growth. Financial resources of the economy are thus better allocated.

6.3.2 Advantages of Stock Exchanges

Having discussed the functions of stock exchanges, let us look at the advantages which can be
outlined from the point of view of (a) Companies, (b) Investors, and (c) the Society as a whole.
1. To the Companies:
(i) The companies whose securities have been listed on a stock exchange enjoy a better
goodwill and credit-standing than other companies because they are supposed to be
financially sound.
(ii) The market for their securities is enlarged as the investors all over the world become
aware of such securities and have an opportunity to invest.
(iii) As a result of enhanced goodwill and higher demand, the value of their securities
increases and their bargaining power in collective ventures, mergers, etc. is enhanced.

(iv) The companies have the convenience to decide upon the size, price and timing of the
issue.
2. To the Investors:

(i) The investors enjoy the ready availability of facility and convenience of buying and
selling the securities at will and at an opportune time.

102 LOVELY PROFESSIONAL UNIVERSITY