Q.Which of the following functions of the Stock Exchange gives investors the chance to disinvest and re-invest in securities ? (A) Pricing of securities (B) Safety of transactions (C) Providing liquidity and marketability to existing securities (D) Providing scope for speculation
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Start your 14-day free trial to unlock the full solution →The function of the Stock Exchange that allows investors to sell existing securities and buy new ones is providing liquidity and marketability.
A financial market is a crucial component of any economy, acting as a bridge between savers and investors. Within this broader market, the stock exchange plays a pivotal role, serving as an organised marketplace where securities like shares and debentures are bought and sold. It facilitates the flow of capital from those who have surplus funds to those who need them for productive investments. To understand which function allows for disinvestment and reinvestment, let us examine the key roles a stock exchange performs.
One primary function is the pricing of securities. The stock exchange provides a continuous market where the forces of demand and supply interact to determine the prices of various securities. When there is high demand for a particular share, its price tends to rise, and conversely, if supply exceeds demand, the price falls. This transparent price discovery mechanism reflects the collective judgment of market participants about the value of a company's shares.
Another vital function is ensuring the safety of transactions. The stock exchange operates under a strict regulatory framework, often overseen by bodies like SEBI (Securities and Exchange Board of India). It establishes rules and regulations for trading, ensures fair practices, and provides a mechanism for grievance redressal. This regulatory oversight protects investors from fraudulent practices and ensures that all transactions are conducted in a transparent and ethical manner, thereby building trust in the market.
The function directly relevant to investors' ability to disinvest and reinvest is providing liquidity and marketability to existing securities. Liquidity refers to the ease with which an asset can be converted into cash without significant loss of value. Marketability means there is a ready market where buyers and sellers can find each other. The stock exchange ensures that investors can readily sell their existing shares whenever they wish, converting them into cash. This cash can then be used to purchase other securities, thus allowing them to re-invest. Without a liquid and marketable platform, investors would find it difficult to sell their holdings, making long-term investments risky and unattractive. The stock exchange provides this continuous market, ensuring that there is always a potential buyer for a seller and vice versa. …
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