Question

What is stock exchange? Discuss its functions.

Hint:

Stock exchanges provide liquidity, price discovery, and opportunities for capital formation, contributing to the efficient functioning of financial markets.

Answer 1

A stock exchange is a marketplace where securities such as stocks, bonds, and other financial instruments are bought and sold. It acts as a platform where investors can trade shares of publicly listed companies. The role of the stock exchange is crucial in the functioning of the financial markets, and it helps to bring together buyers and sellers in an organized and regulated environment. Below are the key functions of a stock exchange: Step 1: Providing Liquidity.
The stock exchange provides liquidity to investors by offering them a platform to buy and sell securities. This liquidity makes it easier for investors to enter and exit investments, as they can quickly find buyers or sellers in the market.
Step 2: Price Discovery.
Stock exchanges play a vital role in price discovery, which is the process of determining the price of a security based on the supply and demand for it. The price of shares in a stock exchange reflects the collective opinion of all market participants, including investors, analysts, and institutions, about the value of the company.
Step 3: Facilitating Capital Formation.
Stock exchanges provide companies with the ability to raise capital by issuing shares to the public. This helps companies finance their expansion, research, and development, thereby contributing to economic growth.
Step 4: Regulating and Monitoring Market Activity.
Stock exchanges regulate and monitor the trading of securities to ensure that the market operates in a fair and transparent manner. They establish rules and regulations that govern trading activities to prevent fraud, manipulation, and insider trading.
Step 5: Providing Investment Opportunities.
Stock exchanges offer investors a wide variety of investment options, ranging from stocks and bonds to derivatives and ETFs. This diversification allows investors to build portfolios based on their risk tolerance and investment goals.