For the uninitiated, the term “stock exchange” could paint a picture of a raging bull in their head. After all, they know a little about it and what it exactly plays. You see, the stock market plays an important role in the financial system of the country and can be seen as a vital component for corporate enterprises to function as properly as possible.
What is more, stock exchanges are deemed as quite useful institutions simply because they provide a deluge of services to the investors. If you are planning to begin trading, or you already started with an investment platform, then it is imperative you understand the very fiber of about the stock exchange.
First, let’s talk about what a stock exchange is.
Stock Exchange Explained
By essence, a stock exchange refers to a platform that allows people to trade in financial instruments, such as bonds, shares, or derivatives, among others. Also called a share market, it is where investors can start buying and/or selling incentives. As far as its important functions are concerned, they are listed below:
#1. Marketability of Securities
A stock exchange is basically the very market when it comes to purchasing and selling securities as mentioned above. And since it is more than capable of providing a ready and continuous market for the said unit, the latter can easily be converted into cash – a process that can be done without further delay.
#2. Evaluation of Securities
In stock exchanges, expect all prices of securities to be determined by the demand of investors and the preferences of suppliers. Even more so, they are capable of integrating the very demand and supply of securities, as well as pinpoint their respective prices. This one right here, in case you did not know, is being done on a continuous basis. As far as the prices that are able to prevail in the stock exchanges are concerned, they are called quotations. These quotations, on the other hand, make it possible for investors to have the ability to evaluate the value of their shareholding.
#3. Safety of Investment
There are rules when it comes to how stock exchanges operate, as well as regulations and by-laws. All of these have been created and approved by the government, bounding all members of the stock exchange. Do you know why stock exchanges are more than capable of providing a near-perfect type of market? Well, that is because they are able to make all transactions publicly known to the investors. In addition to this, they can steer clear over trading and speculation by way of having a variety of regulatory measures. These factors, when combined properly, make it possible for stock exchanges to ensure a much greater measure when it comes to safety and fair dealing with the investors.
#4. Facilitates for healthy speculation
It is speculation that always seems to take advantage of fluctuations in price movement. When talking about the securities market, you need healthy speculation in order to be successful in equating demand and supply of securities at various places. Moreover, it is responsible for regulating the prices of securities, a process it is able to perform to a greater extent. The mechanism of stock exchanges is specifically designed to encourage healthy speculation and, as a result, it enables the shrewd investors to quickly gain benefits from price fluctuations.
Capital formation tends to happen thanks to investments and/or savings. Stock exchanges are basically responsible for facilitating capital formation in the country. Their goal is to create a healthy habit of investing, saving, and even risk-bearing associated and present among all investors. The prices that are being quoted in stock exchanges simply suggest that very extent of companies and their popularity. Investors are then attracted towards companies deemed to be profitable companies; hence, they come forward and decide to invest their savings in the corporate securities. This process, in particular, is what makes it possible for stock exchanges to be successful in facilitating the flow of capital and bring it into more profitable channels.
#6. Regulation and Motivation of Companies
Companies that are looking to list their shares on a stock exchange are expected to follow a set of rules and regulations. For instance, they are all expected to submit any relevant data pertaining to their financial affairs. This information, according to the rules and regulations, must be submitted to the stock exchange on a yearly basis. In other words, companies listed can only safeguard their interest if and only if their financial performance is being monitored closely. That is why the stock exchange is capable of motivating these companies by quoting the prices of securities, especially for those that are hoping to significantly improve their overall financial performance. This also means that the stock exchange is able to bring forth the prevailing business conditions in the country.