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Stock market is a category of capital market. The capital market may be defined as a market for borrowing and lending long term capital funds required by business enterprises. It is the central body in the capital market for handling financial assets and securities for supplying steading flow of capital for a business that has prolonged or indefinite maturity; it also offers an ideal external finance source. The capital market forms an integral part of a country’s financial system, representing all the facilities and the institutional arrangements for borrowing and lending medium- and long-term funds. Like any financial market, it is also composed of those who demand funds (borrowing) and those who supply funds (lenders).
It is the “centre for dealings, mainly of a short-term character, in monetary assets: it meets the short-term requirements of the borrowers and provides liquidity or cash to lenders, it is the place where short-term surplus investible funds at the disposal of the financial and other institutions, and individuals are bid by borrowers, again comprising institutions and individuals and also by the Governments. These activities are facilitated through its primary and secondary layer called the Stock market, where the players constitute a plethora of institutions, where they provide access to the capital market. The participants include Financial intermediaries like insurance companies, investment companies, pension funds, Non-financial business enterprises, and economics units like households and Governments. The stock tradings are either directly supplied or arranged through financial intermediaries; these intermediaries form a stock market tower.
It performs functions like allocations function allows for channelizing the savings of innumerable investors into various productions avenues of investments. Accordingly, the current protection for a period is allocated amongst the multiple users and uses. The market attracts new investors who are willing to make further funds available to the business. It also administers and rations funds by a system on incentives and penalties. Liquidity functions capital market provides a means whereby buyers and sellers can exchange securities at mutually satisfactory prices. It allows better liquidity for the securities that are traded.
Other functions, such as acting as a barometer showing the progress of a corporation and the economy as a whole through price movements of securities; Savings and investments function as a capital market to quickly convert long-term investments into liquid funds, thereby generating confidence among investors and speeding up savings and investments. Transfer functions capital market facilitates the transfer of existing assets, tangible and intangible, among individual economic units or groups. Merger function capital market encourages voluntary or coercive take – over mechanism to put the management of inefficient companies into more competent hands.
The securities market works as a regulator of the capital market; it is wherethe dealings of instruments invested into the capital market are done in the form of securities like shares, debentures, etc. The capital market is called the securities market. The price of securities dealt with in the capital market is determined through the general laws of demand and supply. The prices bring about the equilibrium in demand and supply of securities.; its analysis is dependent on; Yield on securities, The extent of funds available from public savings, Level of demand for funds, funds flowing in the banking institution, general price situation, liquidity of the market.
What is a Stock Market and What it Trades?
The stock market refers to collecting markets and exchanges where regular buying, selling, and issuance of shares of publicly-held companies occur. Such financial activities are conducted through institutionalized formal exchanges or over-the-counter (OTC) marketplaces that operate under a defined set of regulations. The stock market or equity market is primarily known for trading stocks. It also deals with other financial securities – like exchange-traded funds (ETF), corporate bonds and derivatives based on stocks, commodities, currencies, and bonds.
A stock is a security that represents the ownership of a fraction of a corporation. It entitles the stock owner to a proportion of the corporation’s assets and profits equal to how much stock they own. Units of stock are called “shares.” Stocks are bought and sold predominantly on stock exchanges, though there can be private sales and the foundations of many individual investors’ portfolios. These transactions have to conform to government regulations which are meant to protect investors from fraudulent practices.
Equity, typically referred to as shareholders’ equity (or owners equity’ for privately held companies), represents the amount of money that would be returned to a company’s shareholders if all of the assets were liquidated and all of the company’s debt was paid off in the case of liquidation. In the case of acquisition, the value of company sale minus any liabilities owed by the company not transferred with the sale.
Corporate stock and equity instruments represent ownership of a share of a corporation’s assets and earnings and earnings called ‘corporate equity’. A firm undertakes sale stock when it wishes to mobilize capital required for taking up new investments projects or for modernization and expansion projects. The profits earned by a corporation and paid to shareholders are known as dividends.
An exchange-traded fund (ETF) is a type of security that involves collecting protection—such as stocks—that often tracks an underlying index. However, they can invest in any number of industry sectors or use various strategies. ETFs are in many ways similar to mutual funds; yet, they are listed on exchanges and ETF shares trade throughout the day just like a common stock.
A corporate bond is a debt instrument issued by a corporate entity that promises that the firm will make the specified interest payment and a principal amount or the “face value” on the instruments’ maturity. The original purchaser of a bound buys this promise from the firm for an up-front amount, known as the bond price. Unlike stockholders, bondholders own no share of profits. Bondholders are entitled only to the interest payments and the face value due on maturity. Like corporate stock, corporate bonds provide funds to the issuing firm when sold in the primary market. Like stocks, new bonds issues are underwritten by investment banks, which sell these bonds to individual investors.
What is the Purpose of Stock Market?
The actual reality of stock exchanges is associated with numerous risk factors. However, it is considered the heart of the financial market building; it is hindered with risk factors unless approached in a well-regulated and disciplined manner. To maintain a disciplined stock exchange environment, the stock market plays an important role; its principal purpose is to generate business capital and facilitate investors’ profits. It also possesses various subsidiary purposes for smooth and disciplined functioning of the tradings.
The purpose of any subject relates to why that concept was created; the stock market also has its purpose of being served to the capital market to facilitate stock trading and maintain market liquidity and enhance economic growth. Stock markets are the heart of financial institution which regulates and maintain the flow of funds in the market, its purpose to the financial market is profound, which is as follows;
Performing Stock Exchanges
The stock market performs stock exchanges by buying and selling stocks and securities under one platform; it is the avenue that performs all stock exchanges under a well-regulated legal framework
The following are some of the functions;
- it creates a single window exchange facilitated through different intermediaries
- appoint brokers and jobbers to assist investors in trading
- form depositaries to maintain deposits
- listing of the company stocks and securities,
- marketing the stock to attract investors,
- maintain audits,
- fair pricing of stock
- passing required orders for market performance
- settlement of disputes
Provide Protection To Market Participants
Protection to investors was the prime reason for the emergence of the stock market; due to the increasing stock tradings during the 18th, and 19th centuries the fear for fraudulent activities and mismanagement in the company affairs was a significant limitation for the market participants; gave this scenario stock market the prime purpose to protect the interest of the market participants.
- It protects the investors for fraudulent stock tradings
- Provide adequate genuine information about the listed company to the public
- Impose rigorous regulatory standards to maintain consistency in the market
- Provide proper speculations of the market price and ensure the investors with the dividends
- It motivates companies to follows proper ethical standards, corporate governance and timely financial reporting.
The economical building is the central purpose for which the stock markets were established worldwide; its influence on the economy is profound; it affects every part of economic growth and development. Since the stock market is a widely practised financial trading platform, its actions can build an economy and crash. Under the capital market, the efficacies of financial liquidity are primarily measured using stock market tradings. Its core purpose in free-market tradings are;
- it is an excellent economic indicator that analyses the compatibility of the financial market
- it is a tool for orchestrating liquidity in the market which reflects in the economic development through measuring the flow of capital
- The stock market generates and allocates funds to the business, which causes its expansion and diversification.
- investors’ profit growth is boosted, which reflects the development of economic standards of them
- Boost entrepreneurship and self-employment, which affect financial competences.
Financial Forecasting and Planning
People’s financial standards are concomitant to their economic capacity portrayed by them, which has created various strata in planning their finances. Financial and investment patterns have been exposed to multiple avenues and risky ventures, which has cultivated greater financial risk tolerance. All the aspects of livelihood are dependent on one’s financial behavioural patterns, i.e,; their investments, taxing structure, employment, household chores and relief funds.
This period degree of individual investors is an essential variable in determining the size of the investments in assets and the financial category. It also found that there is a higher penetration level of consumer durables in the securities market. Thus it is very evident that stock markets play a dominant role in forecasting financial investments. The stock market has facilitated online trading platforms, self-manageable accounts and audits, various stocks listed by thousands of companies, cost-effective and high returns investments securities, etc. These aspects make the stock market the core for financial planning at all levels. However, its volatile and highly speculative nature may turn a risk factor for financial gains; it causes positive financial planning and literacy effects.
The main objective of the investment is to ensure adequate risk management in the financial platform; since the capital market is highly volatile and speculative, it is prone to numerous perils; it requires a well-regulated risk tolerance mechanism to combat situations like inflation, operation risk, market liquidity downfall, credit risks etc. To serve the purpose of protecting the investors from market risks, the stock market has preached strategies like
- diversifying the portfolio investments
- accept and retrieve timely profits from stocks
- pre-planning future trades after proper speculations
- following updated market trends to mitigate investment risks.
As defined by Gabrielle O’Donovan, “An internal system encompassing policies, processes and people, which serves the needs of shareholders and other stakeholders, by directing and controlling management activities, with good business savvy, objectivity, accountability and integrity.”
From the above definition, it is evident that corporate governance plays a primal role in regulating stock exchanges. The stock market severs the purpose of commemorating corporate governance inside the company management; they encourage the companies to follows
- proper internal governance
- structured board of directors and committee members
- authenticate appointment procedure for directors
- corporate social responsibility
- maintain formal audit, which has to be submitted at the stock market
- facilitate good dialogue between shareholders
- facilities for risk management
- A reasonable remuneration for the duties performed
How Does Stock Market Work
Stock market’s functions by buying and selling securities, corporate stocks and bonds, mutual funds, etc. When the company lists new security in the stock market, it will be evaluated and marketed to the investors; the brokers and other intermediaries make quotations on the dealings and ensure smooth and prompt securities transfer execution. Those stock exchange dealings are of many types;
- Spot delivery contract
- Ready delivery contract
- Forward delivery contract
- Speculative dealing
- Margin trading
- Wash sales
- Blank transfers
- Cornering and rigging.
When the stocks are issued in individual investors’ hands, the stock can be sold and brought by another investor ( with a broker’s help) in a secondary stock market. In this connection, funds transferred in the secondary markets pass between individual buyers and sellers of the stock rather than the corporations. Followed by issuing, the pricing of shares will occur; the stock market prices are done in numerous ways. One of the frequently used formats is through an auction process where buyers and sellers place bids and offer to buy and sell the stocks.
A bid is a price at which somebody wishes to buy, and an offer (or ask) is the price at which somebody wishes to sell when both the values coincide, the trading will be done. This pricing format is influenced by various factors such as demand and supply, market player, bank rate, company profile, dividend policy, previous trade cycles, and speculations that affect the stock’s pricing. Followed by pricing matching and buying and seller occur; this process is orchestrated by the market players such are brokers and jobbers, which was initially done in a manual currently through a computerized system.
Stock markets exist to serve greater purposes; their emergence has caused tremendous growth in the global financial market. It acts as a citadel of financial handlings affecting different fields; it is evident that the stock market is a catalyst for a country’s Gross Domestic Product, reflecting its average economic growth. The governments often frame fiscal policies and regulations, giving primary importance to stock market tradings. It influences political factors, social factors, and economic benefits; it regulates the company affairs and the stock exchange activities to maintain equilibrium in the capital market and facilitate stock trading. Not only as a barometer of economic growth but also the stock market performs the primary purpose of regulating the corporations and financial institutions to conform to corporate social responsibility rules.