Stock exchange; meaning and functions, importance, organizational set-up, membership of the stock exchange, procedure of transaction at the stock exchange. - SS3 Commerce Lesson Note

A stock exchange is a regulated marketplace where buyers and sellers come together to trade stocks and other securities. Its primary function is to provide liquidity and facilitate the efficient buying and selling of securities. It serves as a platform for companies to raise capital by issuing shares to the public and for investors to buy and sell those shares. The stock exchange also helps determine the market price of securities based on supply and demand.

 

Importance:

Stock exchanges play a crucial role in the economy for several reasons. They enable companies to raise capital for expansion and investment by selling shares to investors. This, in turn, promotes economic growth and job creation. Stock exchanges also provide opportunities for individuals and institutional investors to invest their savings and participate in the growth of companies. Additionally, they help in price discovery and provide a transparent and regulated environment for trading.

 

Organizational Set-Up:

Stock exchanges are organized entities governed by regulatory bodies to ensure fair and transparent trading. They have a central marketplace where trading takes place, either physically on a trading floor or electronically through a computerized system. The exchange establishes rules and regulations, monitors trading activities, and enforces compliance to maintain market integrity.

 

Membership of the Stock Exchange:

To participate in trading on a stock exchange, individuals and entities need to become members or have a licensed broker as an intermediary. These members can be brokerage firms, banks, or financial institutions that are authorized to trade on behalf of their clients. Membership requirements and eligibility criteria vary between exchanges and jurisdictions.

 

Procedure of Transaction at the Stock Exchange:

When an investor wants to buy or sell stocks on the stock exchange, they place an order through their broker. The broker then submits the order to the exchange, which matches it with a suitable counterparty. Once the trade is executed, the exchange records the transaction and updates the respective accounts. Settlement of the trade, where ownership and payment are exchanged, occurs a few days later.