The secondary tier of the capital market is what we call the stock market or the stock exchange. The term stock exchange is defined as an association, organization, or body of individuals- whether incorporated or not-established for the purpose of assisting, regulating, and controlling the business in buying, selling, and dealing in securities. Typically bonds are traded Over-the-Counter (OTC), but a few corporate bonds are sold in the stock market. It can enforce rules and regulations on the brokers and firms that are enrolled with them.
Following are some of the most important functions that are performed by the stock exchange:
1) Liquidity
Liquidity describes the degree to which an asset or security can be bought or sold in the market without affecting the price. In other words, your liquidity measures the number of shares or dollar value of shares you traded daily. Liquid assets can be sold without spoiling their value, while illiquid assets may have to be discounted to sell sooner. The presence of the stock exchange market gives assurance to investors that their investments can be converted into cash whenever they want.
2) Raising Capital
For businesses that lack the resources necessary for growth, selling shares on the stock market can provide an infusion of capital, which a company can then use to develop and strengthen the organization. The Stock Exchange provides companies with the facility to raise capital for expansion by selling shares to the investing public. The new and existing concerns need capital for their activities. The new concerns raise capital for the first time and existing units increase their capital for expansion and diversification purposes.
3) Barometer of the Economy
Stock exchanges are the financial barometers and development indicators of the national economy of the country. At the stock exchange, share prices rise and fall depending, largely, on market forces. Share prices tend to rise or remain stable when companies and the economy in general show signs of stability and growth.
4) Corporate Governance
Companies that are publicly listed on a stock exchange must conform to reporting standards that are set by regulating bodies. This includes having to regularly and publicly report their financial statements and earnings to their shareholders. The stock exchange is an organized market. It requires recognition from the Central Government.
In Conclusion
The stock exchange plays a crucial role in facilitating the buying and selling of securities. It provides a regulated marketplace where investors can trade stocks, bonds, and other financial instruments. The functions include price discovery, liquidity provision, transparency, and investor protection. By providing a platform for companies to raise capital and investors to participate in the market, the stock exchange promotes economic growth and fosters efficient allocation of resources. It serves as a barometer of economic health and plays a significant role in shaping investment decisions and wealth creation. Overall, it is a vital institution in the global financial system.
