Role of stock exchanges

Capital Markets are one of the most sought-after platforms for stepping into the world of trading and investments. Everyday millions of investors and traders trade in these markets. All the trades in the markets are processed through an entity known as stock exchange.

There are many stock exchanges in India which carry out millions and billions of trades every day. National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) are the two most prominent and largest exchanges in India. BSE is also the oldest stock exchange in India and dates its origin to late 1800s. There are various regional exchanges in India as well.

Stock exchanges play a prominent role in the consolidation of the national economy and also help in the development of industrial sector especially. India is a developing economy, and in such countries, these exchanges play a cardinal role. They help in mobilizing the savings and ensure safety at the same time. These mobilization helps in promoting the level of capital formation.

(i) Ready Market:

Stock exchange is a convenient meeting place for buyers and sellers of second-hand securities. Investors who have a preference for liquidity (i.e. cash) can sell their securities; and those who wish to invest in securities can buy the same. Since stock exchange ensures liquidity of investment; people are induced to buy securities.

(ii) Safe Market:

Stock exchange is, perhaps, the safest market for having transactions in securities. A stock exchange functions according to a recognised code of conduct and is subject to strict statutory regulations. Since the establishment of SEBI (Securities and Exchange Board of India) in the year 1988, dealings in securities at stock exchanges have become further safer.

In the absence of stock exchange, investing public might be deceived or cheated by shrewd unscrupulous brokers.

(iii) Evaluation of Securities:

Stock exchange determines prices of various securities (in terms of their real worth) through the interplay of demand and supply forces. Prices at which transactions in securities take place are recorded and published, in the form of market quotations.

Securities for which published quotations are readily available; become reliable securities for obtaining loans etc. against these.

(iv) Agency of Capital Formation:

Stock exchange is an agency of capital formation. It draws the savings of the man in the street into productive investment channels. Since stock exchange provides a safe and convenient market for liquidity and investment purposes; people are induced to save and invest in securities.

Through stock exchange, savings of people which otherwise would have gone into destructive channels, are routed into productive channels.

(v) Qualitative Industrial and Commercial Development:

Stock exchange aids in the process of ensuring qualitative industrial and commercial development of the economy. This is so, because, through stock exchange people keep shifting their investment from inefficient companies (which do not pay good dividends) to efficient companies (which promise high returns on investment). This shifting process of investment is specially important for a country where savings are scarce.

(vi) Acting as a Barometer of the Company:

(Barometer is something that shows the changes that are happening in an economic, social or political situation). Stock exchange is sensitive to economic, political and social conditions of the economy; as such conditions affect the prices of securities.

In fact, price trends at stock exchange reflect the economic climate of the country. “Stock exchanges are not merely the chief theatres of business transactions; they are also barometers which indicate the general conditions of the atmosphere of business in a country.” Alfred Marshall

(vii) Control Over Company Managements:

Stock exchange very directly exercises control over the managements of companies, whose securities are listed with it. In fact, those companies whose securities are listed with a stock exchange have to abide by the rules and regulations of the stock exchange.

(viii) Storehouse of Business Information:

Companies, whose securities are listed with the stock exchange, are required to furnish financial statements, annual reports and other reports to the stock exchange. Many stock exchanges publish directories which provide data on the corporate sector. Such information is highly helpful to the government in economic planning. It is equally useful to managements of many business enterprises.