Functions of a Stock Exchange

A stock exchange performs several functions that go well beyond simply hosting buy-and-sell transactions — together, they make it one of the pillars of a modern economy's financial system.

• Providing liquidity and marketability to securities — an investor who has put money into shares or debentures can, at almost any time the market is open, convert that holding back into cash by selling it on the exchange. Without this ready marketability, far fewer people would be willing to invest in securities in the first place, since their money would otherwise be locked in until the company itself chose to return it.
• Continuous price discovery / fair pricing of securities — a stock exchange brings together, at one place, a very large number of buyers and sellers, each acting on their own assessment of a security's worth. The price at which a trade is actually agreed reflects this collective judgement, moment to moment, giving every participant a fair, transparent, publicly known price rather than one privately negotiated between two parties.
• Ensuring the safety of transactions — trading on a recognised stock exchange happens only through registered members (brokers) operating under the exchange's own rules, byelaws and regulations, and under SEBI's overall supervision. This regulatory framework, along with the exchange's clearing and settlement mechanisms, gives investors confidence that a transaction, once struck, will actually be honoured.
• Contributing to economic growth — by channelling the savings of a very large number of small investors into the productive investment needs of companies (who raised that capital originally through the primary market), the stock exchange helps convert idle household savings into capital formation for industry, which in turn supports employment and output growth in the wider economy. …