Page 2 - Lesson Note 3
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conducive climate for an active and growing primary market for new issues. An active and
healthy secondary market in existing securities leads to positive environment among investors.
The following are some of the important functions of a stock exchange.
1. Providing Liquidity and Marketability to Existing Securities: The basic function of a
stock exchange is the creation of a continuous market where securities are bought and
sold. It gives investors the chance to disinvest and reinvest. This provides both liquidity
and easy marketability to already existing securities in the market.
2. Pricing of Securities: Share prices on a stock exchange are determined by the forces of
demand and supply. A stock exchange is a mechanism of constant valuation through which
the prices of securities are determined. Such a valuation provides important instant
information to both buyers and sellers in the market.
3. Safety of Transaction: The membership of a stock exchange is well regulated and its
dealings are well defined according to the existing legal framework. This ensures that the
investing public gets a safe and fair deal on the market.
4. Contributes to Economic Growth: A stock exchange is a market in which existing
securities are resold or traded. Through this process of disinvestment and reinvestment
savings get channelized into their most productive investment avenues. This leads to capital
formation and economic growth.
5. Spreading of Equity Cult: The stock exchange can play a vital role in ensuring wider share
ownership by regulating new issues, better trading practices and taking effective steps in
educating the public about investments.
6. Providing Scope for Speculation: The stock exchange provides sufficient scope within the
provisions of law for speculative activity in a restricted and controlled manner. It is generally
accepted that a certain degree of healthy speculation is necessary to ensure liquidity and
price continuity in the stock market.
TRADING AND SETTLEMENT PROCEDURE
