IndianMoney.com Research Team | Updated On Monday, November 12,2018, 05:53 PM
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Stock Exchange is a major component of the capital markets in India. It is a place where shares of public listed companies are traded. It is an organised market where trading of securities like sale or purchase of securities are conducted in a systematic manner. A stock exchange facilitates stock broker’s trade in company stocks and other securities. A stock may be bought or sold only if it is listed on an exchange. It is the meeting place of the stock buyers and sellers.
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The stock exchange plays an important role in the economy of the country. The stock market maintains the stock indices which are the indicators of the general trend of the economy. Listed below are some of the important roles of stock market:
Raising capital for business: the stock market helps companies raise funds for their businesses by selling shares to the public for investment.
Mobilizing savings for investment: They help the public mobilize savings to invest in high yielding economic sectors, which results in higher yield, both to the individual and to the national economy.
Helps the company grow: the selling and buying of shares helps in the growth of the company by acquisition or fusion.
Profit sharing: the stock market helps both the casual and professional investors earn a share of the company’s profit.
Corporate governance: stock exchanges have proper rules and regulation for companies to get listed. So the listed public sector companies have better management records than the unlisted companies.
Investment opportunity for small investors: small investors can buy a small number of shares. Thus it creates investment opportunity for small investors.
Raising funds for government capital projects: the stock market also helps raise funds for the development projects of the governments by issuing government bonds. An investor buying them lends money to the government. These investments are secure and also enjoy tax benefits.
Some important functions of the stock exchange are listed below:
Economic barometer: a stock exchange is a source to evaluate the economic conditions of a country. The prices of the shares help measure the major changes in an economy. The rise or fall in the prices of the major shares indicates the inflation or the recession cycle of the economy.
Pricing of securities: the stock market helps price the securities based on the factors like demand and supply. The securities of profitable and growing companies contain a higher value as there is more demand for such securities. The pricing of securities is important for investors, government and creditors. The investors can know the value of their investment, the creditors can value the creditworthiness and government can impose taxes on value of securities
Liquidity: The main function of stock market is to provide ready market for sale and purchase of securities. The presence of stock exchanges gives assurance to investors that their investment can be converted into cash whenever they want. The investors can invest in long term projects without any hesitation, because through the stock exchange, they can convert long term investments into short term and medium term ones.
Better allocation of capital: The shares of profit making companies are quoted at higher prices and are actively traded so such companies can easily raise fresh capital from the stock market. The general public hesitates to invest in securities of loss making companies. So, stock exchange facilitates allocation of investor’s fund to profitable channels.
Promotes investment and saving: the stock market also provides options and opportunities for investment in various securities. These encourage people to save more and invest in securities of corporate companies which helps in gaining a higher return in short time than any other form of investment.
Contributes to economic growth: In stock exchange, securities of various companies are bought and sold. This process of disinvestment and reinvestment helps invest in most productive investment proposals and this leads to capital formation and economic growth.
There are two major stock exchanges in India. They are as follows:
Bombay stock exchange: it is the oldest stock exchange in India. It is based in Mumbai and lists close to 6000 companies and is one of the largest stock exchanges in the World. Securities that the BSE lists include stocks, stock futures, stock options, index futures, index options and weekly options. Average daily turnover of the BSE is Rs 200 crores.
National stock exchange: the formation of national stock exchange of India limited, is one of the important developments in the Indian stock market. The NSE has developed into a sophisticated, electronic market, which was ranked fourth in the world by equity trading volume in 2015. Trading commenced in 1994 with the launch of the wholesale debt market and a cash market segment shortly after. The National Stock Exchange has been a pioneer in Indian financial markets, being the first electronic limit order book to trade derivatives and ETFs. The exchange supports more than 3,000 VSAT, making the NSE the largest private wide-area network in the country
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