Meaning

A stock exchange is an entity which provides "trading" facilities for stock brokers and traders, to trade stocks and other securities.
To be able to trade a security on a certain stock exchange, it has to be listed there. Market where existing securities are traded.

THE ROLE OF STOCK EXCHANGE

Stock exchanges have multiple roles in the economy. This may include the following:

Raising capital for businesses Mobilizing savings for investment Facilitating company growth Profit sharing Corporate governance Creating investment opportunities for small investors Government capital-raising for development projects Barometer of the economy

Raising capital for businesses

The Stock Exchange provides companies with the facility to raise capital for expansion through selling shares to the investing public.

Mobilizing savings for investment

When people draw their savings and invest in shares, it leads to a more rational allocation of resources because funds, which could have been consumed, or kept in idle deposits with banks, are mobilized and redirected to promote business activity with benefits for several economic sectors such as agriculture, commerce and industry, resulting in stronger economic growth and higher productivity levels of firms.

Facilitating company growth

Companies view acquisitions as an opportunity to expand product lines, increase distribution channels, hedge against volatility, increase its market share, or acquire other necessary business assets. A takeover bid or a merger agreement through the stock market is one of the simplest and most common ways for a company to grow by acquisition or fusion.

Profit sharing

Both casual and professional stock investors will share in the wealth of profitable businesses through dividends and stock price increases that may result in capital gains.

Corporate governance

Companies tend to improve on their management standards and efficiency in order to satisfy the demands of the shareholders.

Stringent rules for the companies are therefore imposed by stock exchanges and the government (through regulators like SEBI) in order to safeguard the interest of the investor.

Cont.

Despite this claim, some well-documented cases are known where it is alleged that there has been considerable slippage in corporate governance on the part of some public companies. Satyam Computer Services (2009) were among the most widely scrutinized by the media.

Creating investment opportunities for small investors

As opposed to other businesses that require huge capital outlay, investing in shares is open to both the large and small stock investors because a person buys the number of shares they can afford. The Stock Exchange provides the opportunity for small investors to own shares of the same companies as large investors.

Government capital-raising for development projects

Governments at various levels may decide to borrow money in order to finance infrastructure projects such as sewage and water treatment works or housing estates by selling another category of securities known as bonds. These bonds can be raised through the Stock Exchange whereby members of the public buy them, thus loaning money to the government.

Barometer of the economy

At the stock exchange, share prices rise and fall depending, largely, on market forces. Share prices tend to rise or remain stable when companies and the economy in general show signs of stability and growth. An economic recession or financial crisis could eventually lead to a stock market crash. Therefore the movement of share prices and in general of the stock indexes can be an indicator of the general trend in the economy.

Functions of a Stock Exchanges

The role of a stock exchange in a capital market is as follows:(1) Ready and Continuous Market: The stock exchange provides a ready and continuous market for the sale and purchase of securities. (2) Bank Borrowing Facility: Securities listed on a stock exchange serve as a collateral security when an investor need funds from a bank. (3) Promotes Capital Formation: Stock Exchanges promotes capital formation as they encourage investors to invest need funds from a bank.

Cont.
(4) Safety and Fair Dealing: The Stock Exchange operates under rules and regulations framed by the Central Government. The rules and regulations framed by the Central Government are in the interest to ensure safety to the investors and whatever be their dealings, it should a fair one.
(5) Government Funding: Stock Exchanges helps the government to raise funds by selling shares and debentures.

Cont.
(6) Creation of Employment Opportunities: Stock Exchange creates a number of employment opportunities to a number of brokers, sub brokers as they are the intermediaries through which shares are being sold. (7) Evaluation of Securities: Stock Exchanges helps to evaluate the worth of securities, as securities are traded at a certain price on the stock market. Investors are able to determine the real worth of their holdings in the form of shares and debentures which are listed on the stock exchange.

Cont.
(8) Industrial Development: The capital collected through shares and debentures can be put to industrial use, new industries can be started, existing ones can be expanded and modernized and thereby enhancing the industrial development of a country.

(9) Clearing House of Securities: The Stock Exchanges acts as a clearing house of securities. It facilitates easy and quick clearance of transactions of securities between the buyers and the sellers.
(10) Facilitates Flow of Capital: Stock Exchange facilitate the flow of capital to companies who have a high potential to raise substantial funds.

Recent Developments in Stock Exchanges

1.

Regulation of Intermediaries -Strict control is being exercised on the intermediaries such as brokers, sub brokers by the SEBI. It is proposed that the registration should be subject to renewal from time to time instead of making it a permanent one. Brokers are expected to maintain a minimum capital of Rs. 5 lac in major exchanges and Rs. 2 lac in minor exchanges. Change in the Management Structure -The SEBI now requires that 50 percent of the directors must be non-broker directors or the Government Representatives.

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Insistence of Quality Securities-The SEBI has announced recently that only quality securities are listed and traded in stock exchanges. Dividend payment for atleast 3 years out of immediately preceding 5 years of issue.

4.

Prohibition of insider trading-Now, SEBI (Insider Trading) Amendments Regulations, 2002 have been formed giving more powers to SEBI to curb insider trading.
Prevention of price rigging-Powers have been given to SEBI (Prohibition of Fraudulent and unfair trade practices relating to security markets) to curb price

5.

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Protection of investors interest- SEBI issues Investors guidance services to guide & educate investors about investment avenues, their merits, tax benefits, illegal transactions etc. Setting up of credit rating agencies- Agencies have been set up for awarding credit rating to the securities so that the investing public is not deceived by companies. Introduction of electronic trading- BSE has switched over to electronic trading system called BOLT. NSE went over to screen based trading with national network.

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Introduction of depository system- A depository is an organization where securities of a shareholder are held in electronic form through a process of dematerialization. The investor has to open a A/C. It will be credited with the purchase of securities and debited with sale of securities. Stock watch system- Works on mathematical model which keeps a constant watch on market movement. It would bring to light the scrips which are under alert. This facilitates an immediate audit of such scrips.

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