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Unit 3: Primary Market and Secondary Market

3.5.2 Advantages of Stock Exchange Notes

Having discussed the functions of stock exchange, 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.
(a) 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.
(b) 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.
(ii) Because of the assured safety in dealings at the stock exchange the investors are free
from any anxiety about the delivery and payment problems.
(iii) Availability of regular information on prices of securities traded at the stock
exchanges helps them in deciding on the timing of their purchase and sale.

(iv) It becomes easier for them to raise loans from banks against their holdings in
securities traded at the stock exchange because banks prefer them as collateral on
account of their liquidity and convenient valuation.
(c) To the Society
(i) The availability of lucrative avenues of investment and the liquidity thereof induces
people to save and invest in long-term securities. This leads to increased capital
formation in the country.

(ii) The facility for convenient purchase and sale of securities at the stock exchange
provides support to new issue market. This helps in promotion and expansion of
industrial activity, which in turn contributes, to increase in the rate of industrial
growth.
(iii) The Stock exchanges facilitate realisation of financial resources to more profitable
and growing industrial units where investors can easily increase their investment
substantially.

(iv) The volume of activity at the stock exchanges and the movement of share prices
reflect the changing economic health.

3.5.3 Speculations in Stock Exchange

The buyers and sellers at the stock exchange undertake two types of operations, one for speculation
and the other for investment. Those who buy securities primarily to earn a regular income from
such investment and possibly make some long-term gain on account of price rise in future are
called investors. They take delivery of the securities and make full payment of the price. Such
transactions are called investment transactions.

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