Commerce · Ch 8 — Stock Exchange and SEBI
Functions of a Stock Exchange
2
Functions of a Stock Exchange
A stock exchange performs several economic functions that go well beyond simply being a place where shares change hands. AP Intermediate Commerce students are commonly asked to explain these functions in detail, so it helps to group them logically.
| Function | What it means |
|---|---|
| Liquidity and marketability | A listed security can be sold or bought quickly at a fair price, so investors are not locked into an investment. |
| Price discovery | Continuous buying and selling by a large number of participants helps determine a fair price for a security based on genuine demand and supply. |
| Safety of transactions | Trading is confined to registered members who must follow the exchange's rules, and every trade is backed by a clearing corporation that guarantees settlement. |
| Contribution to economic growth | By channelling household savings into productive investment in companies, a stock exchange supports capital formation and industrial growth. |
| Spreading the equity cult | By making share ownership simple and safe, exchanges encourage wider sections of the public to become shareholders rather than keeping savings idle. |
| Scope for healthy speculation | Within limits laid down by SEBI, speculation adds depth and volume to the market and helps absorb sudden demand-supply shocks. |
| Mobilisation of savings | Scattered individual savings are pooled and converted into investible capital for industry and government. |