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Functions and Purpose of a Stock Market

A mutual organization providing trading facilities to stockbrokers and traders to buy or sell stocks and other securities is known as Stock Market.

Stock Market trades in securities that include shares issued by companies, investment bonds and other products. A common location usually deals with record keeping. However, the stocks are traded at different places and on different electronic networks that are speedy and involve less transactional costs. Only the members are eligible to trade on a stock exchange.

A Stock Market is basically divided into two categories – Primary Market and Secondary Market. Primary market deals with the initial presentation and offering of stocks and bonds to investors while secondary market does the subsequent trading.

For companies, the most important source of raising money is the Stock Market. The business houses can trade here publicly and raise additional capital or funds by selling the shares owned by the company in the Stock Market. The flexibility and liquidity provided by the Stock Market allows investors to sell and buy securities easily. This characteristic of Stock Market attracts more investors towards it rather than going in for real estate investment.

If we go into the history, we will learn that the share prices have a great influence on the economy and the social atmosphere of a state. The wealth of households and their consumption greatly relies on the prices of shares held by them. Thus, the central banks always analyze the behavior of the Stock Market so that the financial system works smoothly.

It is beneficial to invest in shares as it leads to a more lucid savings scheme as compared to the idle deposits with banks or consumption of the savings. Investment in shares especially promotes economic sectors such as, agriculture, commerce and industry, eventually leading to economic growth and higher productivity levels.

It is generally observed that the companies whose shares are publicly-acquired gain more economic benefits than the privately-held companies. This is because the public companies have more scope to change owners and thus they are inclined towards improving their management standards and efficiency in order to satisfy the public shareholders, which ultimately leads to more returns to them.

Even a small stock investor can invest in shares as there is no investment limit in Share Market. Thus, it is the wish of a stock investor to decide about the investment amount. Here, a person buys the number of shares he can afford. On the contrary, there are a large number of business houses that require huge capital investment.

Sometimes, the government needs funds to finance infrastructure projects like water treatment plants and hospitals. In such cases, the government decides to sell a category of securities known as bonds. The Stock Market raises such bonds and the public buys them. It eventually leads to the provision of funds to the government. This prevents the need to directly tax the citizens.

The fluctuations in the share prices can be of great help in order to analyze the trend in the economy. This is due to the fact that the share prices rise and fall depending mainly on the market forces.

Defining Stock Market

The concept of stock exchange originated in the Netherlands and Great Britain during the seventeenth century. Initially, it facilitated investors to buy and sell shares of companies to raise money for overseas expansion.

The term Stock Market is generally used to define the sum of all the stocks and other securities in the market, with the exception of bonds, commodities, and derivatives. That is, a stock market is a corporation or mutual organization put up for bringing together the people and the sellers of stocks and securities.

A major part of the total infrastructure for every single society comes from financial markets. The three main tasks performed by the financial system of the market include:

(a) Transfer of payments in the markets.

(b) Directing the savings to investments with profit so as to utilize in the future Stock Market.

(c) Reducing the economic risks for the members.

The Stock Market is the primary source for companies to raise money. The economic growth of a company depends largely on the price of shares and other assets. The increased share prices are related with increased business investment in the Stock Market.

The economic prosperity of households is also affected by the share prices to some extent. Therefore, the central banks keep an eye on the nature of the market. The market statistics show that in the recent decades, shares constitute a large part of financial assets of households.

The major part of this adjustment in financial portfolios has gone directly to shares but a bargain now takes the form of various kinds of institutional investment for groups of people. As examples in the Stock Market the pension funds, mutual funds, hedge funds, insurance investment of premiums, and so on, the list goes on. The trend towards forms of saving with a higher risk has been accentuated by new rules for most funds and insurance, permitting a higher proportion of shares to bonds.

Developed economic nations, like the European Union, the United States, Japan, etc. are running successfully after moving away from government insured bank deposits towards more risky securities.

It is suggested to think seriously and look at the benefits and limitations before dealing in any activity the Stock Market.

The main US markets include the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX) and the National Association of Securities Dealers Automated Quotations (NASDAQ).

The New York Stock Exchange was launched in 1792. It is considered to be the largest and best stock exchange in the country. A company needs to be financially strong and should have leadership quality to be a member of NYSE.

The American Stock Exchange is known as a major exchange for stocks. Though it may seem to be a little riskier but the members earn a lot by investing into it.

NASDAQ was launched in 1971. It is best known for listing the companies that are into technology. Here, you will find many major technology stocks, including Microsoft and Intel.

Every market has its own specialization of the types of stocks. You need to find the best and most suitable out of them.