Stock Exchange - Meaning, Features, and Functions

A stock exchange is a market operating to sell and purchase securities and bonds that are issued by the 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.

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 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 organisations, and corporate companies. It also engages in the procurement and sales of debentures, bonds issued by various organisations.

  • 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 organisations 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 authorised in order to carry out the trading activities, failing which the trade might not be considered valid.

  • Measuring Tool

Among the functions of stock exchange, the trading activities directly impact the growth of an organisation 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 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 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.

Task for you: Find out the merits and demerits of investing in the stock market.

What is the Role of a Stock Exchange?

The functional report of 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 organisations, 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 organisations 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 authorised 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 organisations 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 organisation.

  • Ensure Liquidity

Another role of 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 organisations 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 investment, as one can earn profit by selling the same share later at a higher price.

Task for you: Find out the names of some of the largest stock markets in the world.

However, to complete the stock exchange project, students need to have an appropriate understanding of how it functions. It is a multi-faceted domain and requires a student to be dynamic in his/her approach to be able to comprehend the same quickly.

It is thus advised that you study the subject carefully before delving into the projects or assignments. A clearer understanding is likely to help you sail through even the difficult topics easily.

To know more about these stock exchanges, you can take a look at our online learning programmes. You can develop an in-depth knowledge of stock exchanges function and their relevant features. Also, you can gain access to high-quality study material for your reference.

FAQ (Frequently Asked Questions)

1. What is a Stock Exchange?

Ans: The stock exchange is a market for trading government and non-government securities. For example, NSE or National Stock Exchange and BSE or Bombay Stock Exchange are India’s two renowned stock exchanges. Also, they are regulated by SEBI or Securities and Exchange Board of India.

2. What are the Functions of the Stock Exchange?

Ans: The primary functions of a stock exchange is to conduct trading of bonds and debentures issued by various companies and organisations. Usually, these are traded over the counter, yet there are specific corporate bonds that are traded at stock exchanges specifically.