Roles & Functions of the Stock Exchange

by Stan Mack

    A stock exchange standardizes investments, allowing people to buy or sell discrete and equal shares of ownership in various companies. It facilitates the transfer of funds between investors and businesses, regulating as necessary to provide maximum safety for everyone’s investments. Many stock exchanges exist. The major ones act as barometers of the economic performances of various countries.

    Individual Investors

    Stock markets allow investors to put their money to good use in a business without dealing with all the hassles of actually owning and running a company. If investors choose wisely, they make money through their investments. In return, the companies they invested in get to use the influx of money to develop their businesses. Individual investors get a chance to participate in and benefit from the growth of various businesses, while limiting their risk to no more than what they invested.

    Economic Benefits

    On the scale of a full economy, the stock market is where people can invest their savings in the development of a country. Investors have their individual motivations -- generally, personal profit -- but taken together, investors’ decisions about where they will invest their money usually end up rewarding the companies with the greatest potential for growth and punishing under-performing or unhealthy companies. In other words, the stock market efficiently distributes money to the companies where it does the most good, which strengthens the entire economy.

    Liquidity

    Healthy speculation involves analyzing a company to determine a reasonable price for its stock and then making an investment choice based on whether you think its current price in the stock market is too high or too low. The combined effect of many speculators is to create a liquid market, which means buyers and sellers are equally divided at the current stock price. In other words, if half of speculators are pessimistic about a company and half are optimistic, chances are someone will be willing to buy or sell its stock at the current price.

    Raising Capital

    For businesses that lack the resources necessary for growth, selling shares on the stock market can provide an infusion of capital, which a company’s can then use to develop and strengthen the organization. For example, suppose a company has an idea for a new product but can’t afford to produce and market it. The company can sell shares of itself on a stock exchange, trading partial ownership for the chance to increase the company’s value.

    About the Author

    Stan Mack is a business writer specializing in finance, business ethics and human resources. His work has appeared in the online editions of the "Houston Chronicle" and "USA Today," among other outlets. Mack studied philosophy and economics at the University of Memphis.

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