The secondary market is in the form of stock exchange. It plays an important role in the economic development of the country. It is channelizing the savings of the people and making them available for investment purpose. The following are some of the important functions of a stock exchange.
Functions of Stock exchange
1. Continuous market for securities
The Investors are able to invest in good securities and in case of any risk, it enables people to switch over from one security to another. So stock markets provides a ready and continuous opportunities for securities.
2. Evaluation of securities
It the stock exchange, the prices of securities clearly indicate the performance of the companies. It integrates the demand and supply of securities in an effective manner. It also clearly indicates the stability of companies. Thus, investors are in a better position to take stock of the position and invest according to their requirements.
3. Mobilizes savings
The savings of the public are mobilized through mutual funds, investments trusts and by various other securities. Even those who cannot afford to invest in huge amount of securities are provided opportunities by mutual funds and investment trusts.
4. Healthy speculation
The stock exchange encourages healthy speculation and provides opportunities to shrewd businessmen to speculate and reap rich profits from fluctuations in security prices. The price of security is based on supply and demand position. It creates a healthy trend in the market. Any artificial scarcity is prevented due to the rules and regulations of the market.
5. Mobility of funds
The stock exchange enables both the investors and the companies to sell or buy securities and thereby enable the availability of funds. By this, the money market also is strengthened as even short-term funds are available. The banks also provide funds for dealing in the stock exchanges.
6. Stock exchange Protect investors
As only genuine companies are listed and the activities of the stock exchange are controlled, the funds of the investors are very much protected.
7. Stock exchange helps Capital formation
Stock exchange plays an active role in the capital formation in the country. Companies are able to raise funds either by issuing more shares through rights shares or bonus shares. But when a company wants to go in for diversification, they can issue the shares and raise more funds. Thus, they are able to generate more capital and this promotes economic growth in the country.
Stock exchanges also creates the habit of saving, investing and risk bearing amongst the investing public.
8. Liquidity in Stock Exchange
Institutions like banks can invest their idle funds in the stock exchange and earn profit even within a short period. When necessity arises , these securities can be immediately sold for raising funds. Thus, it is the stock exchange which provides opportunities for converting securities into cash within a short notice.
9. Economic barometer
The most important function of a stock exchange is that it acts as an economic indicator of conditions prevailing in the country. A politically and economically strong government will have an upward trend in the stock market. Whereas an unstable government with heavy borrowings from other countries will have a downward trend in the stock market. So, every government will adopt policies in such a manner that the stock exchange remains dynamic.
10. Control on companies
One of the major function of stock exchange is that it has control on companies. The companies listing their securities in the stock exchange has to submit their annual report and audited balance sheet to the stock exchange. Thus, only genuine companies can function and have the shares transacted. If not, such companies will be black listed and they will find it difficult to raise their capital.
12. Attracts foreign capital
Due to its dynamism and higher return on capital, the stock exchange is capable of attracting more foreign funds. Due to this, the exchange rate of the currency will improve when there is more trade undertaken by the government.
13. Monetary and fiscal policies
The monetary policy and the fiscal policy of the government have to be favorable to businessmen and producers. If they are not so, then through the stock exchange the government may indicate and accordingly suitable steps can be taken.
14. Safety of Capital and Fair Dealing
The stock exchange transactions are made publicly under well defined rules and regulations and bye-laws. This factor ensures a great measure of safety and fair dealings to the average investors.
15. Proper Canalization of Capital
Stock exchange directs the flow of savings into the most productive and profitable channels.
16. Regulation of Company management
The companies, which want to get their securities listed in the stock exchange, should have to follow certain rules and fulfill certain conditions. Thus stock exchanges safeguards the interest of the investing public and also regulates company management.
17. Barometer of Business Progress
Stock exchanges function as a barometer of the business conditions in the country. Booms and depressions are reflected by the index of prices of various securities maintained by the stock exchange. By analyzing the ups and downs of the market quotations, the causes for the changes in the business climate can be ascertained.