QS Study

Functions of a Stock Exchange

The proficient functioning of a stock exchange creates a conducive atmosphere for an active and growing primary market for new issues. A dynamic and strong secondary market in existing securities leads to optimistic 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.
  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.
  3. Safety of Transaction: The membership of a stock exchange is wellregulated and its dealings are well defined according to the existing legal framework.
  4. Contributes to Economic Growth: A stock exchange is a market in which existing securities are resold or traded. 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.
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