20 Important functions of a stock exchange

Important functions of stock exchanges

The following are some of the important functions of stock exchange. For more, refer this article: What are the functions of stock exchange?

Functions of a Stock Exchange
Functions of a Stock Exchange

1. Determination of Fair price

Stock exchanges help to discover fair prices for securities traded on them. Continuous trading activity in stocks and debentures helps in ascertaining price of securities.

2. Industrial financing

Industrial development of a country depends on the availability of capital. Stock exchanges provide the required capital for investment in industries. Industries are assured of long term capital essential for industrial and economic development.

3. Regulation of the corporate sector

Every listed company in a stock exchange has to file documents in the stock exchange such as annual returns, and provide information regarding plans to merge with or acquire other companies, change in management, plans to enter into new businesses. This enables investors to plan their future investment based on information provided by the companies to the stock exchange.

4. Optimum resource allocation

Stock exchanges enable optimum allocation of scare capital resources. Capital is the life blood of all businesses. Stock exchanges aid in the allocation of capital to companies which are performing well and have potential for profitable growth in the future.

5. Investor education

Stock exchanges provide vital information to the investors in their web sites, advertise in newspapers and business magazines regarding the do’s and don’ts in investing and encourage conduct of investor awareness programmes. This enables investors both in the urban as well in rural areas to become aware of stock market investment and make prudent investment decisions.

6. Mobilization of savings

Stock exchanges play an important role in mobilizing savings of individuals and institutions. Savings so mobilized can be utilized to invest in various projects boosting industrial and economic development of a country.

7. Protection of investors

Companies which are listed in the stock exchanges have to comply with various rules and regulations. They have to submit various documents and returns and provide information regarding any important activity they plan to undertake. Stock exchanges have formulated regulations to ensure safety of investors funds.

8. New venture creation

Stock exchanges enable creation of new ventures. Any new venture requires financing. Stock exchanges are an important avenue for new ventures to raise capital for meeting their capital needs. The stock exchange has aided new venture creation by enabling promoters to raise the required funds.

For e.g. the phenomenal growth of Reliance can be attributed to the public issues of shares on a large scale which provided the company large funds to employ in large scale projects.

9. Meeting financial needs of government

The government requires funds to undertake various projects and government companies need funds for expansion, diversification etc. The Central and State governments, municipal corporations, state financial corporations etc have raised crores through the issue of shares, bonds etc.

10. Liquidity

Stock exchanges provide liquidity to investments made by investors. They serve as a platform where buyers and sellers of securities come into contact to buy and sell securities. Therefore any person who owns a security can sell his security in a stock exchange and convert into cash.

11. Facilitate transfer of ownership

Stock exchanges facilitate transfer of ownership of stocks, shares and securities. Securities are regularly traded on stock exchanges which help both the buyers and sellers of securities.

12. Opportunity to create wealth

Stock exchanges enable public to share in the wealth created by the corporate sector. They help investors who are spread across the length and breadth to purchase securities issued by companies. Dividends, bonus shares and benefit of increase in share prices are enjoyed by investors.

13. Industrial development

Industrial development depends on the availability of funds for investment. Stock exchanges enable organizations to issue various types of securities according to their requirements and raise the necessary funds. Thus they aid in the economic development of a country.

14. Attracting foreign investment

Stock exchanges aid in attracting foreign investment. They enable foreign institutional investors (mutual funds, pension funds, hedge funds, corporate of other countries) to invest in securities of Indian companies. Thus they provide an opportunity to companies to attract foreign investment.

15. Reduced dependence on debt

Stock exchanges provide opportunity to companies to raise ownership capital. They enable organizations to reduce their dependence on debt.

16. Serves as an economic barometer

Stock exchange indexes act as an economic barometer of an economy. By looking at the index one can judge the health of the corporate sector. The index is now at around 10,000 points which reflects the healthy trend prevailing in the economy.

17. Aid valuation of corporate

During mergers, acquisitions and takeovers, valuation of companies presents a challenge. Since securities of corporate are traded on a stock exchange and quotations of share prices are made available by the stock exchange, valuation of companies becomes easier.

18. Facilitates expansion and diversification

Stock exchanges facilitate expansion and diversification of organizations. They aid organizations in issuing securities to tap the savings of investors. Funds so collected can be utilized for expansion and diversification activities.

19. Motivates better performance

Share prices of companies are influenced by their performance. Companies which report better performance on a sustained basis, find their share prices increasing, whereas companies which are not performing well find their share prices declining. Since share prices are in the public domain and investors keep monitoring prices of securities, it serves as a motivation to companies to improve their performance.