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Brigham, Eugene F, author of Financial management, defines a financial market as “The place where people and organizations anting to borrow money are brought together with those having surplus funds”. It is an institution or an arrangement that facilitates the purchase and sale of goods and services; it deals with various instruments like deposits, bonds, stocks, loans, etc. It provides borrowers with funds and lenders with earning assets and wealth. It intends to provide liquidity in the market to facilitate seamless trading; comprising the primary market and secondary market effectively maintains stability in the financial market.
The stock exchange is brought under this financial market which deals with stocks and securities intending to provide short-term and long-term financial returns. It aims to direct the flow of money into funding different sectors and enhance savings into long-term investments. Stock exchanges worldwide contribute in massive measure to the growth and expansion of business and contribute to the well being of the national economy and its people. Its main objective is to regulate the stocks and security market by performing their desired format actions. As they deal with almost half the capital market’s money through stock dealings, it influences its economic development.
The stock exchange provides a highly organized market place that helps in trading stocks and receiving debts and debentures; its role in business and economic growth is profound and is interconnected through a system of financial stakeholders. They provide an ideal channel through which an enormous amount of capital flows across the country’s financial and business environment occurring through a network of corporate enterprises.
Stock exchanges ensure liquidity and transferability of financial assets and provide an organized marketplace for investors to buy and sell securities freely. The environment in a stock exchange is highly competitive. They urge to play in a free and fair manner in price dealings; creating a well-regulated passage ensures the participants effectively surpass the hurdles faced in other financial systems. Furthermore, the stock exchanges’ varied opportunities provide an outlook of the capital market’s influential role. The stock exchange’s efficient functioning is responsible for creating a conducive climate for an active and growing primary and secondary market.
Meaning and Nature of Stock Exchange
A stock exchange represents anybody of individuals, whether incorporated or not, constituted to assist, regulate or controlling the business of buying, selling or dealing in securities. It serves as a specialist marketplace for facilitating transactions in existing corporate securities at “fair and equitable” prices. It is a market that deals in stocks and securities that companies issue for raising capital for their business; it is a derivative of the secondary market’s economy, also called a share market. The stock exchange is an essential layer in the secondary market that supply power and energy for the primary market. The Money market systemizes the basis for all financial businesses. The financial instruments are traded under the capital market, where long-term funds are lent and borrowed for profit returns and savings flow.
The capital market consists of the primary and secondary market; the primary market deals with the issuing of new securities rendered by the government or the corporates, whereas the secondary market deals with the already existing stocks and security claims by facilitating transactions and transfers; here, the stock exchange comes into play. This specialized market where stocks and securities exchange occurs is considered a sine-quo-non for the primary market. It expedites the buying and selling of industrial securities, governmental securities, capital funds etc., helps industrial trade and commerce by providing periodical speculations of stocks’ price value and moderating the money market through good rules and policies. It regularly offers sufficient marketability and price continuity to the listed stocks.
ORIGIN OF STOCK EXCHANGE
GLOBAL STOCK EXCHANGES
The global stock exchange has its roots in the European continent during the German and Dutch bourses; 1538 marked the first stock exchange in Hamburg. The first concrete stock exchange began operating in Amsterdam in 1611. The Amsterdam Stock Exchange was also the first to trade in public companies’ shares, including those of the United East India Company. The Amsterdam stock exchange was currently ranked the third most crucial stock market after New York and London until the Second World War. During the reign of Empress Maria Theresa, the Vienna stock exchange, which was established in 1771, started to provide state-issued bound and exchange transactions.
In Italy, the first formal stock exchange was the ‘Milan stock Exchange’, created in 1808. The most active and most international Spanish stock markets, the Bolsa de Madrid, were founded in 1832. Geneva is the oldest of the seven stock exchange In Switzerland, founded in 1850, followed by Basle in 1876 and Zurich in 1887. The London stock exchange is the oldest in the English-speaking world. The merchant venturers began dealing in stocks and shares during the 17th century. An informal market dealing in shares in joint venture trading companies grew up in the coffee houses of Threadneedle Street during the 18th century as a way of spreading the risk to their backers.
The council of Associated Stock Exchanges was formed in 1890, with an amalgam of diverse stock markets in England. By 1967, they had grouped themselves into sex regional stock exchanges, which finally become a part of the stock Exchanges of Great Britain and Ireland, with trading floors in London, Birmingham, Manchester, Liverpool, Glasgow and Dublin.
INDIAN STOCK EXCHANGE
The activities of buying and selling securities in a secondary market are carried out through stock exchanges. Stock exchanges form an integral part of the secondary market in India. There are at present 24 stock exchanges in India recognized by the government. They are located at Mumbai, Calcutta, Delhi, Chennai, Ahmedabad, Bangalore, Hyderabad, Indore, Pune, Kanpur, Kochi, Ludhiana, Mangalore, Patna, Guwahati, Jaipur, Saurashtra, Surat, Baroda, Coimbatore, Rajkot and Meerut, and OTC exchange of India and NSE at Mumbai. Besides, there is also a ring-less and automated stock market operating at the national level known as ‘Over the Counter Exchange of India’ (OTCEI), which has been established to give a significant fillip to the capital market.
The exchange operates through several electronically linked counters at different locations giving rise to a national trading system. It aims to help small and startup companies overcome the problems of raising capital through a public issue at exorbitant cost. It also allows investors to overcome illiquidity, inaccessibility, delayed settlement and transfers that abound with the traditional stock exchanges.
BENEFITS OF STOCK EXCHANGE
The stock exchange has benefitted difference stakeholders in the capital market; it has greatly influenced every country’s section socially, politically and economically. Some of the significant benefits of the stock exchange are as follows;
BENEFITS FOR COMPANY AND ITS MANAGEMENT
Access to capital:
- The prime objective of the stock exchange its to raise money for the listed corporation in the market; the stock exchange facilitates an easy rise in affordable capital to run business
- Stock exchange’s easy marketability and liquidity ensure a quick and steady supply of capital to the business through provisioning the buying and selling of stocks and securities
- This forum also helps the companies to generate additional capital funds without any collateral.
- The stock exchange also facilitates better negotiation in issuing stocks and securities by providing fair pricing of the published stocks.
High profiling and enhanced visibility
- Stock exchange benefits the stock listed company to gain higher status and reputation in the business marketplace by enjoying the confidence of the investing public
- It brings the company under the limelight and enhances its visibility in the public sphere, which helps fund capital and provides more significant support in increasing the market demand and supply.
- Stock exchange creates a continuous display of the listed company’s name and profiles through marketing its stocks and securities on the stock exchange platform.
More control over the management
- A stock exchange facilitates the company to have more control over its management; by generating capital form the stock exchange, the company is protected from external control of its managerial affairs.
- Unnecessary interference of the financial institutions such as venture capitals, banks, and others who lend collateral loans are entirely avoided.
Savings in cost
- High collateral value for bank loans and other capital fundings are wholly avoided by listing stocks in the stock exchange. Its imposition of huge costs is saved through public issuing of capitals.
- The stock exchange allows companies to raise funds through the capital market instruments at a low cost compared to other loans.
Enhance market liquidity
Liquidity refers to the degree to which an asset can be quickly bought or sold in the market at a price reflecting its intrinsic value. Stock exchange market’s performance is measured with market liquidity, analyzing how well the country’s stock market allows stocks and securities to be bought and sold at stable, transparent prices. One of the significant advantages of the stock exchange to the economy is that the stocks traded are liquid circulated into two market -issuers who indulge in continuous buying and selling, which is primary market and the investors to exchange stocks and investments by buying and selling the securities at any time, which is the secondary market.
- Stock exchange assures securities’ genuineness as the listing is made after a thorough analysis of a company’s capital structure, the management pattern, and business prospect.
- Spread of stock exchanges operations geographically all over India all are regulated under one platform
- Stock exchange abide by all government made laws, rules and regulations
- It imposes fine, penalty and inquiry into any violations or fraudulent activities when orchestrated within the stock exchange market.
Online trading- spreading geographically
- Accessing a large pool of capital market investors through the computerized network is made possible by the recent stock exchange developments. Through a nationwide network for servicing of investors, companies listed on the stock exchange can have a large investor base spreading geographically, which boost economic growth at a global scale.
Public debt platform- long term benefits
- The stock exchange is also a supplier of long-term benefit schemes to the investors; it provides a public debt platform by trading government securities that produce a colossal financing resource to perform governmental activities.
- By executing public debts as government securities traded by Banks, Life Insurance Corporations, Provident funds, Pension to support governmental needs of the country’s economic development, benefits economic growth.
In stock exchanges, high returns are often supplied by long-term financial trends, where the price value of the stock occurs after some time but provide significantly high returns. This factor is one of the most promising benefits of the stock exchange to investors.
A stock exchange facilitates transparency in managing the stock in the capital market;
- it evaluates the actual worth of securities and provides the intrinsic value of the company to avoid deceitful investments
- Safeguarding general public interest by ensuring equitable allotment, easy transfer, disclosure of proper information, etc.,
- Assures the existence of good faith or an absence of fraud concerning the issue of securities.
- Providing activities of quick transfer registration and corporate information
Safety in investing
- Stock exchanges’ seamless physical and electronic trading platforms perform to ensure complete safety and security to the market participants.
- Its mechanism offers more excellent protection to investors by adequately investigating the company and the projects before listing and marketing its stocks to the capital market.
- Its fundamental function of handling stocks and securities are governed under proper rules and regulations and is abided by the stock exchange to ensure protected trading
- All the fraudulent activities will be duly enquired and sanctioned.
Investors have the advantage of deferring from paying tax for the invested stock; there is no need to include the trading in assessment for the purchased stocks when filing tax returns.
- Since the stock exchange is a growing market and is dynamic; it creates new opportunities and serves people; it has been designed as a single-window trading platform accessible to many people throughout the country and worldwide.
- Buying and selling may be resorted to from any part of the world through online trading platforms
- It facilitates faster deal settlement for investors across the counters spread over the entire county.
- The interconnected network of the stock exchange, which the country creates, facilitates financial operations by integrating the entire capital market under one roof.
- Boon to closely-held companies whose stocks are held by a small number of people, these corporations are encouraged to go public because the stocks can be listed even if only 40 per cent of public capital (now a minimum of 20 per cent in case of closely-held and new companies) is offered for public trading.
- Facilitates wider dispersal of economic activities by encouraging small companies and small investors to participate in stock exchanges to expand and diversify their businesses
- Promoting over-all stimulation to venture capital activities there-by promoting entrepreneurship.
The stock exchange has emerged to be a citadel of the financial world by performing various crucial functions in social, political and economic scales. Its significant role in the primary market and secondary money market has benefitted its multiple stakeholders in the capital generation, savings for long-term needs, and business growth. It has undergone numerous changes and developments since its emergence; its prime role in mobilizing the savings, promoting investment culture among people, enhancing expansion and diversification of business and financial market growth through its unfettered flow of surplus funds are significant factors.
It has been efficiently functioning in a well-regulated manner to serve the market participants’ needs and the economy’s benefit. The nominal growth on demand for long=term funds due to the weak industrial base and low savings rate led to the emergence of this organized indigenous capital market; evolutions in the realm of capital market are unimaginable. The Stock exchange has been a ceaseless benefitting platform for all its beneficiaries from its time of existence. However, it has various challenges and demerits, yet; it has never stepped down from being a stronghold for the financial market’s functioning. It is highly advised that different financial market analysts view the stock exchange activities and not fall prey to false speculations. Investors must access it with the utmost care and caution to avoid transgressions and violations.