Finance

Stock Exchange and Its role in Economy

The Indian Securities Contracts (Regulation) Act of 1956, defines Stock Exchange as, “An association, organization or body of individuals, whether incorporated or not, established for the purpose of assisting, regulating and controlling business in buying, selling and dealing in securities.”

In simple terms an exchange is an institution, organization, or association which hosts a market where stocks, bonds, options, futures, and commodities are traded. Buyers and sellers come together to trade during specific hours on business days. Exchanges impose rules and regulations on the firms and brokers that are involved with them. If a particular company is traded on an exchange, it is referred to as “listed”.

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Few of the major stock exchanges in the world are the Bombay Stock Exchange, The New York Stock Exchange, Tokyo Stock Exchange, Shanghai Stock Exchange, and the Hong Kong Stock Exchange.

The role of Stock Exchanges are varied and highly important in the development of the economy of a country. They measure and control the growth of a country.

Stock markets are the places, where exactly you do your business. Your stock trading transactions are executed at the stock exchanges through your broker unless you have a membership with that exchange, which enables you to trade directly. Stock exchange apart from being the hub of the primary and secondary market, they have a very important role to play in the economy of the country. Some of them are listed below.

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  1. Continuous Market: The primary function of stock exchanges is the creation of a continuous market, where securities are bought and sold in large volumes.
  2. Evaluating the price of securities: A stock exchange provides a platform to deal with securities. The forces of demand and supply work freely in the stock exchange. In this way, the prices of securities are determined.
  3. Creating investment opportunities for investors: A stock exchange provides liquidity to securities. This gives the investor a double benefit-first, the benefit of the change in the market price of securities can be taken advantage of, and secondly, in case of need for money they can be sold at the existing market price at any time. These advantages provided by the share market encourage the people to invest their money in securities. In this way, people’s money gets invested in industries and economic development becomes possible.
  4. Provides safety and security in dealing: Stock exchanges are organized markets. They fully protect the interest of investors. Each stock exchange has its own laws and bye-laws. Each member of the exchange has to follow them and if any member is found violating them, his membership is canceled.
  5. Spreading awareness about Equity: Share market collects every type of information (more particularly about their economic condition) in respect of the listed companies. Generally, this information is published, or in case of need, anybody can get it from the exchange free of any cost. In this way, it guides investors by providing various types of information. Consequently, the number of shareholders in companies is increasing continuously. Thus, the stock exchanges are playing a vital role in ensuring wider share ownership.
  6. Raising capital for businesses: Exchanges help companies to capitalize by selling shares to the investing public.
  7. Barometer of the economy: They maintain the stock indexes which are the indicators of the general trend in the economy. They also regulate stock price fluctuations.

 

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