Meaning of Stock Exchange
Stock Exchange refers to that organized market where the shares, debentures of joint stock companies, and other government securities are sold and purchased.
The other names of the stock exchange are Share Market, Speculation Market; Stock Exchange Market, etc.
The Stock Exchange is the barometer of a country’s prosperity.
Definition
According to Prof. K. L. Garg in his book, ‘Stock Exchange in India‘
Stock Exchange is an organization of persons dealing in sale and purchase of shares, debentures and bonds etc. which works for speculation under predetermined rules for the public on commission.
Economic Utility and Importance of Stock Exchange
-
Provides Market to Securities for Sale and Purchase
It is the centre of the sale and purchase of securities of different registered companies. In other words, the stock market provides a place or market for the sale and purchase of securities.
-
Provide Liquidity to Security
Liquidity means the quick conversion of securities into cash through their sale and purchase. The stock exchange is that organized market, where any person can sell! or purchase shares, and debentures and convert them into cash anytime. In this way, it provides liquidity to securities.
-
To Assess the Value of Shares
It has details of the securities of all companies, registered with it. It also provides the current value of all securities. The newspapers and other magazines publish the current value of securities from information received from the stock exchange.
-
Provide Chance for Investigation
Each investor who invests his money in a company requires information on the working of that company and other similar companies competing with it The reason behind this is the market value of shares or securities does not only depend on the disposition of the issuing company but also on the value of shares of other similar companies. Therefore, the stock exchange allows this kind of investigation to investors.
-
Helpful in Providing Loans to the Government
For the completion of its schemes or plans, sometimes the government also requires funds, which it can acquire by the sale of securities through the stock exchange. Thus, it provides a market for the sale and purchase of such securities.
-
Information Regarding Listed Securities
It also issues all important information about the listed or: registered companies from time to time. This information is provided free of cost to any person who demands it.
-
Brings Safety in Dealings
The transaction of securities in an exchange is done under the rule of ‘The Securities Contract Act 1956’ which brings safety in dealings from unlawful activities.
-
Stabilizes Securities through Listing
Before starting the transactions of shares of a company in an exchange, the companies are listed. Listing is done only for those companies whose economic condition is sound. Listing makes the public know that financially, the company’s position is strong and stable. In this way, the stock exchange performs the task of depicting the nature of the securities of the listed companies in the eyes of the public.
-
Eerometer of Economic Prosperity
The political conditions of a country directly influence the value of securities in the market. Thus, if a nation is passing through a political crisis or there are chances of such happening the value of securities will fall. On the other hand, if the conditions are favourable with a stable and peaceful government the securities will show a rise in value. In this manner, the stock exchange acts as a barometer of economic prosperity and the political ups and downs of a country.
-
Speculation
This is also one of the important activities of an exchange. Ordinarily an individual purchases the shares of a company whose E.P.S. (Earning Per Share) is high or which can pay him more and sells it afterwards at an increased price. Whereas a speculator has no concern with the earnings per share or the ability of the company to earn profits, he purchases the shares of any company intending to earn quick profits and the result depends on chance and luck. It is a form of gambling, which cannot be fully considered unlawful but the government puts restrictions on speculative transactions. Such transactions take place within the stock exchange and are authorised.
From the above analysis, it is clear that the Stock Exchange is not only a market for the sale and purchase of shares but also a barometer of a country’s progress, and economic, business and political conditions. But sometimes the activities of a stock exchange hurt the progress of industry and commerce. This happens when the brokers produce an artificial increase in the value of securities to earn quick profits. These fluctuations in the value of securities cause losses to ordinary investors. The ‘Harsad Metha’ scam is a burning example of such huge losses to ordinary investors.
Thus, the activities of a Stock Exchange are important in their place but may also cause harm to the economy, if they encourage speculation.