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Stock Market Operations

Notes 3.5.1 Functions of a Stock Exchange

The functions of stock exchange can be enumerated as follows:
1. Provides ready and continuous market: By providing a place where listed securities can
be bought and sold regularly and conveniently, a stock exchange ensures a ready and
continuous market for various shares, debentures, bonds and government securities. This
lends a high degree of liquidity to holdings in these securities as the investor can encash
their holdings as and when they want.
2. Provides information about prices and sales: A stock exchange maintains complete record
of all transactions taking place in different securities every day and supplies regular
information on their prices and sales volumes to press and other media. In fact,
nowadays, you can get information about minute to minute movement in prices of selected
shares on TV channels like CNBC, Zee News, NDTV and Headlines Today. This enables
the investors in taking quick decisions on purchase and sale of securities in which they are
interested. Not only that, such information helps them in ascertaining the trend in prices
and the worth of their holdings. This enables them to seek bank loans, if required.
3. Provides safety to dealings and investment: Transactions on the stock exchange are
conducted only amongst its members with adequate transparency and in strict conformity
to its rules and regulations which include the procedure and timings of delivery and
payment to be followed. This provides a high degree of safety to dealings at the stock
exchange. There is little risk of loss on account of non-payment or non-delivery. 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 contributory 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.

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