Stock Exchange and Its Regulation
A stock exchange is an organized marketplace that enables buyers and sellers to conduct transactions quickly and economically in existing securities. Its primary purpose is to provide marketability and liquidity for long-term investments. It also ensures the free transferability of shares and other securities held by the public. Besides facilitating purchase and sale transactions, the stock exchange continuously evaluates and reflects the value of traded securities.
Characteristics of Stock Exchange
- Organized market – Stock exchanges are structured and regulated markets for buying and selling securities.
- Dealing in securities – Various securities such as shares, debentures, and bonds are traded here.
- Working under rules and regulations – All transactions are carried out according to the by-laws of the stock exchange and the guidelines of SEBI (Securities and Exchange Board of India).
- Trading in listed securities only – Only securities officially listed on the exchange can be traded.
- Authorized participants – Buying and selling are permitted only through members or authorized brokers of the exchange.
Functions and Objectives of Stock Exchange
- Ready market for securities – Provides an active marketplace for buying and selling existing (secondary) securities.
- Continuous valuation of securities – All transactions are recorded and made public, ensuring official price quotations.
- Investor protection – Operating under strict rules assures investors of fair and transparent dealings.
- Channelization of capital – Directs capital into profitable ventures. Poorly performing companies lose investors, while efficient companies attract fresh investment.
- Encouragement of capital formation – Through publicity, price quotations, and media coverage, stock exchanges encourage people to invest their savings, boosting capital formation.
- Scope for speculation – Skilled investors may speculate on price movements to earn profits, contributing to market activity.
Importance or Role of Stock Exchange
A. Role towards the community
- Promotes economic growth – Encourages investment of savings into productive enterprises.
- Facilitates marketability – Provides a regulated platform that enhances the liquidity and transferability of securities.
- Encourages capital formation – Promotes savings and investment, thereby increasing national capital.
B. Role towards companies
- Enhanced reputation – Companies listed on a stock exchange gain credibility and prestige.
- Wider market – Listing across multiple exchanges expands a company’s investor base.
- Higher valuation – Listed shares generally command higher market value relative to earnings and asset strength.
C. Role towards investors
- Fair dealing – Strict rules ensure transparency and investor confidence.
- Liquidity – Listed securities can be easily converted into cash through market transactions.
- Security for loans – Listed securities are generally accepted as collateral for bank loans.
Causes of Price Fluctuations in Stock Exchange
- Earnings of companies – Stronger earnings drive demand and share prices up.
- Actions of financial institutions – Large-scale buying or selling by domestic and foreign institutions significantly impacts prices.
- Bank rates – Changes in the lending rate declared by the Reserve Bank of India affect liquidity in the market.
- Role of underwriters – Artificial transactions by underwriters may temporarily inflate prices.
- Trade cycle – Share prices rise during economic booms and fall during depressions.
- Political factors – Political stability and pro-business policies usually raise stock prices, whereas socialist or restrictive policies may depress them.
- Sympathetic fluctuations – A rise in a few companies’ shares often influences a general upward trend across others.
- Demand and supply – Prices fluctuate based on the balance of supply and demand for particular securities.
- Speculative pressure – Continuous tussle between bullish and bearish trends fuels price volatility.
Suggestions for Improvement of Stock Exchange
- Greater transparency in prospectus – Strict action should be taken against companies failing to disclose full information as required by SEBI.
- Curbing insider trading – Stronger surveillance and enforcement are needed to prevent misuse of insider information.
- Introduction of innovative instruments – New financial products should be developed to attract different categories of investors.
- Ban on grey market operations – Unregulated markets and publication of unofficial rates must be strictly prohibited.
- Streamlining stock broking – Brokers and sub-brokers should follow transparent, computerized, and SEBI-compliant practices.
- Coordination among exchanges – Effective coordination between traditional exchanges, OTC exchanges, and NSE should be ensured to protect investors.
- Improved liquidity – Mechanisms should focus on genuine delivery-based trading rather than excessive speculation.
Conclusion
Frequently Asked Questions (FAQs)
What is a stock exchange? And why is a stock exchange important?
A stock exchange is an organized marketplace where securities such as shares, bonds, and debentures are bought and sold under a set of regulations. It provides liquidity to investments, ensures transparency in transactions, protects investors, and channels savings into productive enterprises, thereby boosting economic growth.
Who regulates stock exchanges in India and What are the major stock exchanges in India?
The Securities and Exchange Board of India (SEBI) regulates stock exchanges in India to ensure fair practices and protect investor interests. The two leading stock exchanges in India are the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).
What causes share prices to fluctuate?
Share prices fluctuate due to factors such as company earnings, investor demand and supply, interest rates, political events, trade cycles, and speculation.
Can anyone buy shares directly from a stock exchange?
No, only registered members or brokers of the stock exchange can trade directly. However, investors can buy or sell shares through authorized brokers and online trading platforms.
Is investing in stock exchanges risky?
Yes, stock market investments involve risk due to price fluctuations, but risks can be minimized with proper research, diversification, and long-term investment strategies.
