OMTEX CLASSES: WRITE SHORT NOTES ON ROLE OF STOCK EXCHANGE (MAR 2009)

WRITE SHORT NOTES ON ROLE OF STOCK EXCHANGE (MAR 2009)


Meaning: -Stock exchange is a specific place where trading of the securities is arranged in an organised method. In simple words it is a place where shares, debentures and bonds (securities) are purchased and sold. The term securities include equity shares, preference shares, debentures, government bonds, etc. including mutual funds.

Definition: -Securities contracts Regulation Act, 1956 defines stock exchange as “an association, organisation or body of individuals whether incorporated or not, established for the purpose of assisting, regulating and controlling business in buying, selling and dealing in securities.

The stock exchange plays an important role in capital markets. The role of stock exchanges is vital for the economic development of a nation. The role of stock exchanges is briefly stated as follows.

1.      Encourages Capital Formation: -The main role of stock exchange is that it enables public limited companies to raise long term funds from the stock market. The company can issue shares and debentures and obtain long term funds.

2.      Facilitates Listing of Shares: -The Stock exchanges facilitates listing of shares issued by public limited companies. The companies that issue shares to the public can get their shares listed on more stock exchanges in the country. The listing of shares is done through the listing agreements.

3.      Facilitates Trading of Shares: -The Stock exchanges facilitates trading of shares. The shares listed on the Stock exchanges can be trade. The shares can be traded between the sellers and buyers on the stock exchange.

4.      Generates Employment: -It generates Employment facilities in the country. A number of brokers, sub-brokers, and others do get their employment because of Stock exchanges.


5.      Facilitates Capital Formulation: -The Stock exchanges encourages investors to invest in the primary and secondary stock markets. For investing in stock markets, investors need to save money. Saving lead to investment in shares and other securities. Investment leads to capital formulation.

6.      Stimulates Industrial Development: -The Stock Exchanges facilitates mobilization of long-term funds through the issue of shares and debentures. The long term funds can be utilized by companies for the following purposes.

a.      Expansion and Modernization
b.      Setting up of new projects.


7.      Provides Revenue to the Government: -The Stock Exchanges provide revenue to the government, either directly or indirectly. The Stock exchanges pay tax on the revenue or profits earned by them. Also, the investors who invest on stock markets are subject to capital gains tax.