Stock exchange is one of the most vital factors and the backbone of any country’s economy. A stock exchange is primarily a place for buyers and sellers to trade in shares of a publicly listed company. Stock exchanges provide scope for individuals and institutions to invest their money, besides giving avenues to businesses to raise capital for growth. The importance of the stock exchange can be summarised by providing liquidity, encouraging investment, and supporting economic development. In this article, we’ll examine the significance of the stock exchange, its functions, features, and role in the financial system.
What is a Stock Exchange?
A stock exchange is a marketplace where stocks, bonds, and derivatives are sold between a buyer and seller. It’s an organised, regulated platform where companies raise capital by mobilising investors into profitable opportunities. The most popular exchanges in India are the NYSE, London Stock Exchange, Bombay Stock Exchange, and BSE/National Stock Exchange, NSE.
The stock exchange is transparent since every transaction is recorded and monitored. This way, fair trade is ensured. Prices of stocks fluctuate according to demand and supply, investor mood, and economic conditions on the exchange. Stock exchanges increase the growth of companies since companies raise funds through public offerings.
This also provides liquidity to the investors because they can always buy or sell their shares at any given time during market hours. In addition, it acts as the backbone of the economy by strengthening savings and investments, which in turn contribute to capital formation and development in the economy.
Importance of Stock Exchange
The importance of the stock exchange is much more than just buying and selling shares. It plays a significant role in the financial system, and its implications are essential not only for the economy but also for businesses, investors, and society. A good stock exchange catalyses the growth of economies, helps the company obtain capital, inspires investments, and brings financial stability. This section will deal with the significance of the stock exchange, its role in affecting all different parts of the economy, and why it is regarded as the backbone of the financial markets.
Capital Formation
Hence, the main aim of any stock exchange is to provide an avenue for capital raising. Companies look at raising funds to grow a business, introduce a new product into the market, or expand some part of the infrastructure. Regarding that, companies issue public shares through a stock exchange called an initial public offering.
Through this, companies have an avenue with many investors willing to invest their money in their shares. The capital from this will assist in helping businesses grow and produce more jobs, contributing positively to the general economy. Raising such high amounts of capital would be challenging and cumbersome without stock exchanges.
When a firm like Reliance Industries comes out with issues of shares to the public, it generates billions of rupees. It then pls this money into new ventures and markets, and hundreds of thousands of jobs get created.
Creation of Wealth for Investors
The stock exchange allows the creation of wealth by laying money over time. Investors can earn returns in the form of the following:
- Capital Appreciation: It’s the process through which the share price rises over time. Think of an instance where you bought one share for 100 rupees, and its market price rose to 150 rupees, so you gain an amount of ₹50.
- Dividends: The profit gained by a specific company is distributed to all the shareholders by the company through dividends. Therefore, it forms an assured type of income earned by the investor.
Investment in the stock market accelerates people’s savings beyond the conventional systems of fixed deposits or savings accounts. It encourages long-term planning and wealth management.
Example: If an investor had bought shares of Infosys in the early 2000s, that investment would have grown manifold by now, creating significant wealth.
Indicator of Economic Health
The stock exchange is considered the barometer of the economy. Growth and decline in stock prices tell the general condition of businesses, industries, and the economy. A booming market usually shows company growth, increasing profits, and an overall healthy economy. On the other hand, a declining market might indicate that the economy is slowing down, business activities are slowing down, or financial crises are at hand.
Policymakers, economists, and investors watch the trends in the stock market closely to understand the economic conditions and make informed decisions. Stock market information provides real-time data on investor sentiment, business confidence, and market expectations.
Example: In the 2008 global financial crisis, the worldwide stock markets crashed and recorded a sharp economic decline. On the other hand, during an economic boom, stock markets either hit all-time highs or get very close to it.
Corporate Governance and Transparency Facilitates
The firms quoted on a stock exchange must follow strict codes and regulations established by the regulatory bodies in the form of the Securities and Exchange Board of India (SEBI). For this purpose, regulation establishes transparency on the part of companies, disclosure of financial information from time to time, and business ethics on the part of companies.
It facilitates proper corporate governance and ensures minimum fraud and scandals relating to the finances. Transparency must give real investors adequate information, enabling them to make appropriate decisions based on facts. That will ensure complete investment confidence for listed companies concerning a source.
The listed companies will prepare quarterly reports on annual financial statements and communicate the significant business activities. This kind of transparency will save investors and give confidence to the economic and financial system.
Liquidity to Investors
The stock exchange, therefore, gives liquidity, the ability to sell or buy shares when one wishes. Stock is one asset that can quickly be sold and converted into cash within a very short period without much loss of value compared to real estate and other assets.
This liquidity attracts many investors to the stock market because they believe they can access their cash whenever they desire. It ensures that shares are traded at fair market value based on prevailing supply and demand.
For instance, if the investor is desperate to get money sooner, he can very quickly sell his stock on the stock market in a few minutes. Stock tends to be more attractive than an illiquid investment such as real estate.
Savings and Investments
The stock market encourages saving money and investing instead of putting it to wrong use in unfertile business ventures that accrue no payback. Promising high returns ensures that people inject their money through shares, unit trusts, etc.
This investment culture results in capital formation, where money is spent for productive purposes such as business expansion, infrastructural development, and technological innovation. It also serves as an avenue through which people prepare to realise future financial goals such as retirement, education, or a house.
Example: Many people now invest in the stock market using SIPs, depositing small amounts of money regularly, adding up to the financial result over a long period.
They attract Foreign Investments
It attracts Foreign Institutional Investors (FIIs) and Foreign Direct Investments (FDIs). A well-regulated and attractive stock exchange always attracts the eyes of foreign investors searching for profitable ventures. It offers a favourable background as a liquid, stable, and transparent stock market.
Foreign investments benefit the economy, including capital inflows, employment generation, and new technologies and business practices. It increases the GDP of the country and improves financial markets.
Example: The stock markets of India, which are mainly BSE and NSE, have attracted billions of dollars in foreign investments in the last decades, which boosts the country’s economic growth.
Helps Raise Government Funds
The government raises money to finance public projects, infrastructure, and welfare through the stock exchange. The government issues government bonds and securities, and the stock exchange provides a medium for trading.
Bonds are bought by domestic and foreign investors, who provide the much-needed capital needed to finance large-scale projects independent of taxes and foreign aid.
Example: The Indian government finances the construction of highways and other transport facilities by issuing bonds on the stock exchange, Power plants, etc.
Reduces Capital Costs
Companies sometimes find it cheaper to raise capital through the stock exchange rather than borrow from banks. Companies that issue shares do not pay interest, as with loans. This makes the cost of capital cheaper and gives companies flexibility in finding investments for growth and innovation.
Lower capital costs help startups and small-scale enterprises access capital and enhance their partnership and employment.
Besides, it raises research and development expenditure, eventually leading to technological innovation.
Example: Indian startups like Zomato and Paytm were able to raise vast sums of money through public issuances that helped the companies grow domestically and internationally.
Financial Literacy and Awareness
The stock exchange significantly contributes to increasing the financial literacy of the individual. More and more investors are expanding the pool of individuals trained in financial markets, risk management, portfolio diversification, and principles of economics.
The stock exchanges and financial institutions provide educational programs, investment seminars, and other web-based resources so that people are well-equipped to make decisions regarding their money matters. This keeps a man in control of his financial future.
The Investor Awareness Programs launched by SEBI and other stock exchanges educate the masses about the pros and cons involved in the game of investing in the stock markets.
Functions of Stock Exchange
Without stock exchange functions, a sound financial system is impossible. Yet, it doesn’t simply sell and purchase its shares. That is apart from selling their shares, this stock exchange further aids in helping raise company capital, enabling a price discovery mechanism for the security on offer to maintain the financial assets’ liquidity and many more, as presented below:
Providing Liquidity and Marketability
The stock exchange allows the prompt sale and purchase of securities. This ensures that an investment will be easily liquidated if liquidation becomes inevitable. More investors will be attracted to the investment if the market is liquid because they can sell out quickly and not with much hassle.
Price Discovery
It determines at what price security has to be sold. The company’s performance influences these prices, economic conditions, and investors’ demands. The actual value of company shares comes out through continuous buying and selling on the stock exchange.
Capital for BusinessOne has a significant role in performing its functions, allowing capital. To be raised.d Expansion, research, or new venture capital can thus be raised for companies by offering their shares to the public. Therefore, this method is called the Initial Public Offering (IPO).
Providing Transparency and Fair Play
The stock exchange is highly controlled in its functions. It maintains transparency and justice in every action to minimise false transactions. So, investors establish confidence.
Boost of Economic Growth
Investments in the country strengthen the economy because capital is furnished to businesses. The presence of stock exchanges will increase employment. Industrial activities expand, and money markets grow larger.
Encouraging Savings and Investing
The stock exchange encourages people to invest their savings instead of keeping idle.
Stock investments help generate more returns than the money saved in the traditional savings account.
Features of Stock Exchange
The features of the stock exchange highlight unique and essential parts of the financial system. Such features not only aid an investor in knowing how the stock market functions and make him understand why it is crucial to the economy.
Organized and Regulated Market
A stock exchange is an organized market regulated by such governmental bodies as the Securities and Exchange Board of India and SEBI of India which ensures honest, transparent, and fear-free conduct of all transactions.
Purchase and Sales of Securities
It involves trading and selling of securities in the stock exchange: stocks, bonds, and others such as derivatives. They handle all this by offering electronic transactions that make all the procedures rapid and prompt.
Transparency and Fair Practices
The greatest characteristic of transparency is that of the stock market. There are controls placed on trading such that fraud, inside trading, or manipulation does not take place. Everyone receives instant stock performance, as well as data about companies, their performances and market trends, in real life.
Incessant Market Operations
Stock exchanges work on all working days of the market at fixed hours. Hence, there would be infinite trading as any investor can buy or sell shares any number of times he wishes to.
Investment Options
Diversified investment opportunities are offered by the stock exchange. A person can choose the shares of any company, industry, and sector according to his desire to take risks and the goals of investment.
Standardized process.
All the transactions of a stock exchange are carried out on standardized rules and procedures. This helps work without disputes between the buyer and the seller.
Types of Stock Exchange
Different kinds of stock exchanges exist according to their nature, working process, and security. Knowing about the type of stock exchange allows an investor to figure out where it is most convenient to invest his money.
Primary Stock Exchange
The primary market is where companies issue their new shares directly to the public for the first time through an IPO. Here, companies raise capital directly from investors.
Secondary Stock Exchange
In the secondary market, the existing shares are bought and sold between investors. The company gets no money from these transactions. The secondary market provides liquidity to the investors.
Over-the-Counter (OTC) Market
The OTC market trades securities directly between parties, not via a centralised exchange. This market is less regulated and is usually used for trading smaller or less popular securities.
Regional Stock Exchanges
Regional Stock Exchange
It is a regional exchange of a country. Regional companies are the ones engaged in trading inside the stock exchange. Nowadays, National Exchanges such as NSE and BSE hardly occur
International Stock Exchange
It includes New York Stock Exchange, London Stock Exchange, and Tokyo Stock Exchange, which enable the cross-border investor to sell international companies’ equities
Significance of Stock Exchange FAQs
1. What is a stock exchange used for?
A stock exchange mainly allows a business to trade securities through which they raise fund and increase its economic growth and savings and also investment.
2. What contribution the stock exchange is making to the society?
The stock exchange certainly makes a good contribution to society. It creates fresh wealth and, therefore, fresh employment. It, thus, initiates the growth of an economy. Its role increases saving mentality among the people as well as expands the business that generates revenue for the government for its public sector.
3. What is the Role and contribution of stock exchange?
Its role and importance are related with the fact that it promotes capital formation, provides liquidity, ensures transparency, and acts as an economic indicator. It helps to connect the investor with the business and brings financial growth.
4. State the Need and importance of the Bombay Stock Exchange.
This fact is that it is one of the oldest stock exchanges in Asia and it acts as a platform for safe securities trading, due to which it facilitates investments within the Indian economy and hence also facilitates capitalization.
5. What are the needs and relevance of stock exchanges in India?
The creation of wealth within an economy causes an economy to develop or grow and is made by the process of capital formation that occurs within an economy.
India.
