What is Stock Exchange? Nature,Functions

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Meaning and Definition of Stock Exchange

Stock Exchange is a market set-up which is very much organized and caters the buying and selling of the securities. It refers to a market where the activities of buying and selling of the securities is carried-out in a systematic and simplified way as per the directions of the SEBI. It may also be termed as the stock market or the secondary market.

According to Securities Contract Regulation Act, 1956, “It means anybody or individuals whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying and selling in securities”.

Nature of Stock Exchange

  1. It engage in formerly issued securities.
  2. The beginning of the security does not take place through this source i.e.,
  3. Securities are not allotted directly by the corporation to investors.
  4. Securities are traded by the current investors to other investors.
  5. It delivers liquidity to the investment and augments the marketability of securities.
  6. The proposing buyer and seller can purchase and sell securities via brokers.
  7. It simply transmits existing securities between buyers and sellers.
  8. It not considered as the direct source of generating capital.

Functions of Stock Exchange

1. Generation of cash: In a stock exchange, the shares and the securities can be converted into cash. It is a market place where numerous buyers and the sellers are available and those who want to sell their holdings can get the same processed without much time and their cash is generated instantly.

2. Availability of Securities: For securities, It serves as the means to a ready market. Initially, When the securities get the approval of being listed, It may change as many hands. Both the buyers and sellers of the securities are readily available at the stock exchange for trading purpose.

3. Raising Funds: Both the existing and the new companies requires funds for their growth and expansion. The funds can be obtained through this type of market as many investors are ready to serve the purpose.

4. Safety in Dealings: All the transactions that take place at a stock exchange are carried under the umbrella of securities contract regulation Act, 1956 Which lays down the provisions and the manner in which the transactions are to be dealt, thereby leaving no room for manipulation. The contract parties are mentally free as they are assured about the transparency.

5. Trading of Public Debt: In the recent times, stock exchanges have become an important source of raising the public debt due to the lot of interference of government. Thus, public debts are also traded in stock exchange through the brokers.

6. Disclosure of business information: In case of the companies, where the securities are listed on the stock exchange, they have to periodically provide the information relating to the annual reports, financial statements and others statements as directed by the stock exchange. On the basis of the information submitted by the stock exchange, they decide about their for the future.

Importance of Stock Exchange

  • Industrial growth and development.
  • Capital Formation.
  • Investment decisions.
  • It useful to measuring of the economy.

Limitations of Stock Exchange

  • Insider trading.
  • Limited forward trading.
  • Outdated share trading system.
  • Lack of a single market.
  • Problems of interface between primary and secondary markets.
  • Inadequacy of investor service.