What Are The Functions Of Stock Market?

The stock market comprises retail investors, traders, brokers, institutional investors, researchers, advisors and regulators. For many, the stock market represents an opportunity to create wealth. From the perspective of a country, stock markets are essential for promoting investing of savings and driving growth. This article takes a look at various functions of stock markets/exchange.

Stock Exchanges of India

In India, these functions are carried out by stock exchanges like the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE). 

Bombay Stock Exchange

Established in 1875 as the Native Share and Stock Brokers Association, the Bombay Stock Exchange (BSE) in Mumbai, India stands among the world’s largest exchanges alongside NYSE, NASDAQ, LSE, and SSE. Functioning as a key player in India’s capital market, BSE supports retail debt, facilitates efficient capital raising for corporations, and offers diverse trading options—equities, currencies, debt and more. Its pivotal functions include price determination, contributing to the economy, ensuring liquidity, and maintaining transactional safety, regulated by SEBI. BSE’s primary index, Sensex, tracks the top 30 companies, while sectoral and market-cap-based indices further diversify its offerings for investors and traders.

National Stock Exchange

NSE, founded in 1992 in Mumbai, India, emerged as the first electronic stock exchange in the nation. NSE’s innovation includes a screen-based trading system, fostering transparency. Operating Monday to Friday, NSE offers a diverse investment spectrum, from equities to debt, ensuring fair, efficient, and transparent trading. Its indices, led by the Nifty 50, track the top 50 companies. Sectoral and market capitalization-based indices further diversify their offerings for investors and traders.

Let’s dive right in and understand more about the functions of the stock market in detail. 

Functions Of the Stock Market

1. Price discovery

One of the most important functions of stock exchanges is bringing buyers and sellers together in a single place and facilitating price discovery. The role of stock exchanges is tremendous in creating a place where the impact of all factors that can affect businesses is incorporated into stock prices. Since the pricing of securities incorporates all relevant factors, investors, traders, creditors, and governments need not make repetitive assessments.

2. Promotes investment of savings

For an economy to grow, the citizens’ savings must be deployed in avenues productive to the economy. A part of this is taken care of by the banking system that provides loans using deposits. A smooth and trustworthy stock market would encourage citizens to invest in businesses that can use this capital to produce more, produce better and employ more.

Thus, stock markets can play a key role in the economic development of an economy.

3. Promotes better allocation of capital

Information on companies in the stock market is easier to obtain as news outlets are likely to cover any events that might affect their market value. The companies themselves are required to disclose key information. Investors also get access to information on bulk deals, insider trades, and holdings of institutional investors and promoters.

Additionally, companies can be divided into various sectors and market cap categories, allowing for simpler comparison.

Thus, investors are empowered to make better decisions and allocate capital to good businesses.

4. Becoming a medium for foreign investments

In developing countries like India, foreign investments play a crucial role in promoting new industries and enhancing existing ones. The proceeds can be used to adopt technological advancements, improve production capacities, hire better talent and enrich the existing human capital. 

A stock market that functions smoothly, is regulated against malpractices, and is transparent can give foreign investors the confidence to invest in the companies of a particular country. India’s economic growth can benefit from foreign investments. Like most developing countries, the disposable income in India is lower compared to developed countries. This makes it difficult to raise capital solely from domestic sources.

5. Driving economic growth and being an economic barometer

As mentioned earlier, a well-functioning stock market can help draw investments from domestic sources. These investments can be employed to improve production capacities and can help increase job opportunities. Thus, stock markets can help drive the economic growth of a country.

Furthermore, a stock market can act as an economic barometer as the effects of changes in economic growth expectations and significant events are reflected in stock prices. When economic conditions are favourable, stock prices tend to be rising and vice versa.

6. Liquidity

Liquidation of assets, i.e. converting them into cash, can be a tedious task. Finding a buyer is difficult, and getting a reasonable bid is even more difficult. But, if the asset in question is a security that can be traded in the stock market, the situation changes dramatically. Stock markets help connect buyers and sellers across geographical and socioeconomic boundaries. This makes it a lot simpler to buy or sell assets.

7. Safe transactions

Companies listed on stock exchanges are regulated and required to meet certain standards. Also, investors can expect a basic level of information to be available on all companies in the stock market.

Additionally, regulators and stock exchanges work towards protecting the interests of investors and limiting malpractices like price manipulation, ensuring the safety of transactions.

8. Provides scope for speculation

Stock markets provide scope for speculation in a fair and regulated manner. Healthy speculation can help smoothen changes in asset prices. As situations develop, speculative activity affects asset prices. The change in asset prices happens in phases instead of skyrocketing or free-falling prices. Also, speculative trades ensure assets remain liquid (easy to trade).

Final Thoughts

Stock markets represent an opportunity to create wealth for many of us. But that is not all! In addition to this, they play an important role in driving investments from domestic and overseas sources. They also bring transparency to asset prices and facilitate safer transactions of securities.

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