functions of a stock exchangethe stock exchange

Question

Functions of a Stock Exchange

The stock exchange is a market place where investors trade in securities. It is a competitive market involving large numbers of buyers and sellers.

Various types of shares are traded on the stock exchange. They are categorized into Group A, Group B1, Group B2 and Group Z based on their market capitalization and trading volume. The stock exchange provides liquidity and continuity in price to the players of the market. In order to ensure a fair bargain, two way quotes are available in the stock exchange for trading shares. These quotes are based primarily on the demand and supply factor of the market. A good stock exchange facilitates the following important activities in the economy of a country:

• Favorable climate for the growth of primary market.
• Widens investment opportunities for investors.
• Improves availability of resources for the business enterprises.
• Buoyancy in new issues.
• Increases confidence among the stock market players.

Some of the important functions of a stock market are:

Provide a Continuous Market: It is one of the important objectives of the stock market to ensure stability in price as the trading activity progresses. The stock market achieves this aim by providing a continuous market infrastructure to the investors. Thereby, it ensures liquidity in the market. Some of the important characteristics of a continuous market are:

1. Frequency of trades;
2. Small spread between bid and ask prices;
3. Immediate execution of orders; and
4. Change in price being minimum as the transaction takes place.
5. A continuous market helps in creating marketable liquid investments and collateral lending.

Frequency of Sales: A market will be liquid only when a buyer/seller can find a seller/buyer. If there are no buyers/sellers for some securities or if there is a long wait before a buyer/seller can find a counterparty, such markets are called illiquid markets. The market should have three important dimensions of liquidity. They are:

1. Depth.
2. Breadth.
3. Resilience.

 

Depth refers to the situation wherein buy and sell orders are available at the quoted price for the desired quantity. If it is not available, then the market is termed as a shallow market. The number of transactions or the number of orders determine the breadth of the market. Otherwise, the market is known as thin. The response to orders to the change in price reflects the resilience of the market.