What are the basic functions of the stock market

The stock exchange is an institution where securities are sold (stocks, bonds, foreign exchange, futures), as well as trade in certain goods. The exchange rate at which securities brokers will trade on that day will be determined by stockbrokers on the basis of a sales or purchase order at their disposal. The store then comes in supply and demand.

The basic functions of the stock exchange are:

Attracting Savings Available

The stock market participates in financing the economy by offering a certain degree of liquidity and capital mobility to the investors. Encourages public access to securities withdrawn during the issue for 2 reasons:

1. The first reason lies in the lack of knowledge of all financial needs. Who knows that a company is opening today that will become the “stock market” of the market in the near future. Maybe only a small circle of people in the immediate vicinity of the company.

2. The second reason lies in the fact that few depositors are willing to invest their money in start-ups as the risks are increased. Fortunately, there are always those brave who are willing to take the risk and invest in such businesses. They are the initiators and carriers of economic progress.

Opening capital

The company is founded by one or more people, with or without the support of financial organizations. These are the founders who bring in start-up capital to start a business. If the business proves successful and the company wants to develop further, but its own financing options are not sufficient, the introduction to the stock market is one of the possibilities to secure additional financing. In order for a company to be listed on the stock market, it is necessary to create a market for its titles. It can be created if it is going to issue new shares in the market. This is called equity opening. Thus, the opening of capital is caused by the dispersion of shares and capital into the public.

Facilitating the development of industry groups

In order for a company to successfully sell its products, it must have the means to fight competition. Companies may need external growth or operations leading to the acquisition of new businesses in order to win new markets and invest in the direction of high profitability. A company or group that, for financial or commercial reasons, wishes to control another company must purchase it in its entirety or acquire a sufficient number of shares. In order to be able to offer a certain price, it is necessary to estimate the value of the enterprise. If the company is not listed on the stock market then the valuations and analyzes take quite a long time, and if the company has already listed its titles on the stock exchange, this takeover process will be much easier, since the listed company is already valued by the investment community. The number of shares is multiplied by the exchange rate and the market value of the company is obtained. The company only offers a slightly higher price per share than the market and is very likely to acquire it in the very short term.

The stock market acquisition operation developed in the US and then expanded to other developed countries. They are known as Mergers & Aquisition or Take over bid.

Economy barometer

If stock market behavior correctly reflects economic reality, then it can be considered a barometer. We differentiate the enterprise level from the macroeconomic level.

At the enterprise level, when an individual purchases shares, they acquire a share in the assets and a right to a share in the future profit. This will be decided if they believe that the future assets of the company will increase and that acceptable dividends will be paid. Any fact or information about the company will encourage the shareholder to think and evaluate whether or not his goals will be achieved, and depending on whether he or she will decide whether to retain, increase or decrease the number of shares. Depending on their behavior, stock prices will change. The stock exchange rate is a market assessment of the ability of an enterprise to increase its sources and profits.

At the macroeconomic level, we distinguish between long and short term.

In the short term, the stock market is endowed with a sensitivity like seismographs. Events recorded in the press may cause certain investors to interpret this as the beginning of significant changes and accordingly increase or decrease sales or purchases, and consequently changes in exchange rates.

In the long run, the stock market reflects the development of economic activity. If short-term or seasonal variations are eliminated, an image of one long-term tendency is obtained.

Basic of Stock market & its function | What is Stock Exchange - NSE & BSE role in Market | Episode 2 (October 2020)