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Stock Market and its functions

Stock market is a public market where buying, issuing and selling of stocks take place. Stocks on the

other hand are equities, representing constituent ownership of the company. The stock market

primarily serves two major crucial purposes, the first purpose is to necessitate capital to corporations

so that they can expand and grow its operations. The second purpose is to give investors an

opportunity to purchase stocks from public trading companies. Besides the two major purposes, stock

markets also perform a number of functions, they include the following;

a. To provide marketability and liquidity to existing securities. According to Lazonick (2017),

stock markets necessitate continuous and ready market for buying and selling stocks. Through

such a platform, shares can be bought and sold depending on the preferences of buyers and

sellers.

b. Pricing of securities. Depending on the forces of supply and demand, stock markets help in

evaluating the value of a security, this particularly helps in necessitating instant data and

information for both buyers and sellers.

c. Safety of transactions. Unlike other independent markets, stock markets provide safe

transactions for both participants. All participants taking part in the transaction are fully

regulated and are mandatory required to carry out the transactions within the established legal

frameworks.
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d. Economic barometer. Stock markets also act as a reliable barometer used to measure the

economic status of a country; this is because major economic changes are usually reflected in

stock prices.

e. Providing scope for speculation. Shares, when purchased exclusively with an aim of gaining

profit is referred to as speculation (Ake 2010). Stock markets necessitate scope within the

arrangements of policies for speculating in a controlled and restricted manner.

f. Spreading of equity culture. Most stock markets have substantial information regarding listed

firms and companies, this type data is crucial since it helps investors and companies in

educating the public about better investments in securities, thereby spreading a wider

ownership of stocks.

Theoretical foundation of breakeven analysis

Break-even analysis presupposes the examination and calculation of the extremity of safety

for a unit based on associated costs and collected revenues. Break-even analysis focuses on the fixed

cost levels relative to the profit gained by distinct unit produced and sold. In other words, firms with

lower fixed costs tend to have a lower break-even analysis. Break-even analysis is quite useful when

determining the desired sales mix or the targeted production level. Calculations and metrics are

dependant on estimations of the break-even point. Break-even metrics are calculated by dividing the

aggregate fixed costs by the price of the product less variable costs. According to Cafferky (2010), a

break-even analysis acts as a financial tool that helps organizations in determining the stage in which

a certain product will be profitable. In real-life situation, a break-even analysis can be described as

the situation where a company is neither making losses or profits, however, all costs are fully

covered. Break-even analysis can also be used as a useful tool used in studying the relationship

between fixed cost, revenue and variable cost. The notion of break-even analysis is contingent on
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marginal costing theory (Sintha 2020). Under marginal cost theory, the total costs of producing or

manufacturing a product or service is segregated into two main parts; fixed and variable costs. Fixed

costs in this case are constant costs that do not change even in variations in volume, variable costs on

the other hand vary depending on variations in production.

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Works Cited

Ake, Boubakari. "The role of stock market development in economic growth: evidence from some

Euronext countries." International Journal of Financial Research 1.1 (2010): 14-20.

Cafferky, Michael. Breakeven Analysis: The definitive guide to cost-volume-profit analysis. Business

Expert Press, 2010.

Lazonick, William. "The functions of the stock market and the fallacies of shareholder

value." Corporate Governance in Contention (2017): 117-151.

Sintha, Lis. "Importance of Break-Even Analysis for the Micro, Small and Medium

Enterprises." International Journal of Research-Granthaalayah 8.6 (2020).