Definitions and function of stock exchanges

Definitions and function of stock exchanges: Stock Exchange (also called the Stock Market or Share Market) is one important constituent of the capital market. Stock Exchange is an organized market for the purchase and sale of industrial and financial security. It is convenient to place where trading in securities is conducted in a systematic manner i.e. as per certain rules and regulations.

It performs various functions and offers useful services to investors and borrowing companies. It is an investment intermediary and facilitates the economic and industrial development of a country.

The stock exchange is an organized market for buying and selling corporate and other securities. Here, securities are purchased and sold out as per certain well-defined rules and regulations. It provides a convenient and secured mechanism or platform for transactions in different securities. Such securities include shares and debentures issued by public companies which are duly listed at the stock exchange, and bonds and debentures issued by the government, public corporations, and municipal and port trust bodies.

Stock exchanges are indispensable for the smooth and orderly functioning of the corporate sector in a free market economy. A stock exchange need not be treated as a place for speculation or a gambling den. It should act as a place for safe and profitable investment, for this, effective control of the working of the stock exchange is necessary. This will avoid misuse of this platform for excessive speculation, scams, and other undesirable and anti-social activities.

The London stock exchange (LSE) is the oldest stock exchange in the world. While Bombay stock exchange (BSE) is the oldest in India. Similar Stock exchanges exist and operate in the large majority of countries of the world.

Definitions and function of stock exchanges

Characteristics or features of the stock exchange are:

1. The market for securities: A stock exchange is a market, where securities of corporate bodies, and government, and semi-government bodies are bought and sold.
2. Deals in second-hand securities: It deals with shares, debentures bonds, and such securities already issued by the companies. In short, it deals with existing or second-hand securities and hence it is called the secondary market.
3. Regulates trade in securities: The stock exchange does not buy or sell any securities on its own account. It merely provides the necessary infrastructure and facilities for trade in securities to its members and brokers who trade in securities. It regulates the trade activities so as to ensure free and fair trade
4. Allows dealings only in listed securities: In fact, stock exchanges maintain an official list of securities that could be purchased and sold on their floor. Securities that do not figure in the official list of the stock exchange are called unlisted securities. Such unlisted securities cannot be traded on the stock exchange.
5. Transactions effected only through members: All the transactions in securities at the stock exchange are affected only through its authorized brokers and members. Outsiders or direct investors are not allowed to enter the trading circles of the stock exchange. Investors have to buy or sell the securities at the stock exchange through the authorized brokers only.
6. Association of persons: A stock exchange is an association of persons or a body of individuals which may be registered or unregistered.
7. Recognition from Central Government: The stock exchange is an organized market. It requires recognition from the Central Government.
8. Working as per rules: Buying and selling transactions in securities at the stock exchange are governed by the rules and regulations of the stock exchange as well as SEBI Guidelines. No deviation from the rules and guidelines is allowed in any case.
9. Specific location: A stock exchange is a particular marketplace where authorized brokers come together daily (i.e. on working days) on the floor of the market called trading circles and conduct trading activities. The prices of different securities traded are shown on electronic boards. After the working hours market is closed. All the working of stock exchanges is conducted and controlled through computers and electronic systems.
10. Financial Barometers: Stock exchanges are the financial barometers and development indicators of the national economy of the country. Industrial growth and stability are reflected in the index of the stock exchange.