Meaning of Stock Exchange

A stock exchange is an important factor in the capital market. It is a secure place

where trading is done in a systematic way. Here, the securities are bought and
sold as per well-structured rules and regulations. Securities mentioned here
includes debenture and share issued by a public company that is correctly listed
at the stock exchange, debenture and bonds issued by the government bodies,
municipal and public bodies.
Typically bonds are traded Over-the-Counter (OTC), but a few corporate bonds
are sold in a stock exchange. It can enforce rules and regulation on the brokers
and firms that are enrolled with them. In other words, a stock exchange is a
forum where securities like bonds and stocks are purchased and traded. This
can be both an online trading platform and offline (physical location).
A stock exchange is a market operating to sell and purchase securities and
bonds that are issued by government bodies as well as public and municipal
bodies. There are predefined rules and regulations that play an active role in the
purchases and selling of such products.
Since this market does not directly deal with money, instead conducts
exchanges pertaining to securities, this type of market is termed as a capital
market. The stock exchange meaning is often associated with the term shares.
You might have heard about buying or selling shares at a specific price, or even
that the price of shares is either increasing or plummeting.

Functions of Stock Exchange

Following are some of the most important functions that are performed
by stock exchange:

1. Role of an Economic Barometer: Stock exchange serves as an economic

barometer that is indicative of the state of the economy. It records all the
major and minor changes in the share prices. It is rightly said to be the
pulse of the economy, which reflects the state of the economy.
2. Valuation of Securities: Stock market helps in the valuation of securities
based on the factors of supply and demand. The securities offered by
companies that are profitable and growth-oriented tend to be valued
higher. Valuation of securities helps creditors, investors and government
in performing their respective functions.
3. Transactional Safety: Transactional safety is ensured as the securities that
are traded in the stock exchange are listed, and the listing of securities is
 done after verifying the company’s position. All companies listed have to
adhere to the rules and regulations as laid out by the governing body.
4. Contributor to Economic Growth: Stock exchange offers a platform for
trading of securities of the various companies. This process of trading
involves continuous disinvestment and reinvestment, which offers
opportunities for capital formation and subsequently, growth of the
economy.
5. Making the public aware of equity investment: Stock exchange helps in
providing information about investing in equity markets and by rolling out
new issues to encourage people to invest in securities.
6. Offers scope for speculation: By permitting healthy speculation of the
traded securities, the stock exchange ensures demand and supply of
securities and liquidity.
7. Facilitates liquidity: The most important role of the stock exchange is in
ensuring a ready platform for the sale and purchase of securities. This
gives investors the confidence that the existing investments can be
converted into cash, or in other words, stock exchange offers liquidity in
terms of investment.
8. Better Capital Allocation: Profit-making companies will have their shares
traded actively, and so such companies are able to raise fresh capital from
the equity market. Stock market helps in better allocation of capital for the
investors so that maximum profit can be earned.
9. Encourages investment and savings: Stock market serves as an important
source of investment in various securities which offer greater returns.
Investing in the stock market makes for a better investment option than
gold and silver.

Features of Stock Exchange:

Features of a Stock Exchange
To understand the stock exchange, students should know the characteristics of the same.
Having a clear idea of the workings will aid in getting an overall comprehension of the
topic.
The features of the stock exchange can be listed in the following ways -
 Securities Market
It is the capital market that deals with the sales and purchase of securities of the
government, government organizations, and corporate companies. It also engages
in the procurement and sales of debentures, bonds issued by various organizations.
 Regulatory Body
Though the exchange does not necessarily involve the direct trade of bonds and
debentures, there are brokers and members of the exchanges who facilitate such
trade.
  Dealings
The stock exchange definition says that it has to deal with only the organizations or
companies that are listed under its ambit. Even the securities to be traded must be
registered with the stock exchange.
 Mode of Operation
The members of the stock exchange or even the brokers are to be authorized in
order to carry out the trading activities, failing which the trade might not be
considered valid.
 Measuring Tool
Among the functions of the stock exchange, the trading activities directly impact the
growth of an organization or business. Therefore, it acts as a measuring tool for
businesses in terms of assessing their overall growth.
 Obligatory
The functioning of all the stock exchanges in India is regulated by SEBI or the
Securities and Exchange Board of India. Therefore, every stock exchange is meant
to oblige and abide by the pre-fixed rules and regulations of SEBI.
Altogether, stock exchanges make up for the effective functioning of a business.
Commerce students have to be aware of the importance of the stock exchange in
the Indian marketplace.
In addition, they should also know how the trading of bonds and debentures can
directly impact business growth. A deeper insight into these topics will help them in
understanding the topic closely.

What is the Role of a Stock Exchange?

The functional report of the stock exchange reveals that it is one of the integral parts of an
economy. Irrespective of whether the economy is growing or not, a stock exchange acts as
a barometer to gauge the growth of organizations, both governmental and non-
governmental.
The functions of a stock exchange can be understood through the following pointers -
 Securities Pricing
The stock is responsible for assessing the rise and fall in demand for the securities
of the organizations and business. After that, they fix the prices of the same
accordingly; the securities in most demand are priced higher than others.
 Safer Transactions
It also ensures the safety of trading activities. Since only the indexed and authorized
members can list their securities with the stock exchanges, one can rest assured of
the security these exchanges provide.
 Growth in the Economy
The listing of multiple organizations in the stock exchange leads to effective
investment and disinvestment of the securities. Likewise, people can invest in higher
productive investment schemes. Therefore, it will lead to the overall economic
growth of the organization.
 Ensure Liquidity
 Another role of the stock exchange is to provide a market where investors can
readily buy and sell securities. As a result, the investors can rest assured that their
investments are secured and can be liquidated as and when required.
 Capital Allocation
The stock exchanges value the organizations whose share prices are significantly
higher than others. It is due to the profit-making capabilities of those companies,
hence capital allocation is also carried out in a convenient manner by them.
 Promotes Investment
Stock exchanges encourage the habit of saving and investing among the common
people. These are secured and offer remarkable benefits with comparison to other
options such as gold or silver. Purchasing shares of profitable companies are among
the most lucrative options as an investment, as one can earn profit by selling the
same share later at a higher price.