Which of the following are functions of a stock exchange?
(A) Providing liquidity and marketability to securities being issued for the first time.
(B) Determining the prices of securities through the forces of demand and supply.
(C) Contributing to economic growth by channelising savings into their most productive investment avenues.
(D) Ensuring wider share ownership by fixing the issue prices of new shares.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → (B) and (C) Only
(A) Providing liquidity and marketability to securities being issued for the first time. — Incorrect. A stock exchange gives liquidity and marketability to already existing securities. Securities issued for the first time are sold in the primary market.
(B) Determining the prices of securities through the forces of demand and supply. — Correct. Share prices are determined by the forces of demand and supply on the exchange.
(C) Contributing to economic growth by channelising savings into their most productive investment avenues. — Correct. Through disinvestment and reinvestment, savings are channelised into their most productive investment avenues. This leads to capital formation and growth.
(D) Ensuring wider share ownership by fixing the issue prices of new shares. — Incorrect. The exchange widens share ownership by regulating new issues, better trading practices and educating the public. Fixing the issue price of new shares is not a function of a stock exchange.
NCERT (Pre-rationalised Edition): “1. Providing Liquidity and Marketability to Existing Securities: The basic function of a stock exchange is the creation of a continuous market where securities are bought and sold. It gives investors the chance to disinvest and reinvest. This provides both liquidity and easy marketability to already existing securities in the market.” “2. Pricing of Securities: Share prices on a stock exchange are determined by the forces of demand and supply. A stock exchange is a mechanism of constant valuation through which the prices of securities are determined. Such a valuation provides important instant information to both buyers and sellers in the market.” “4. Contributes to Economic Growth: A stock exchange is a market in which existing securities are resold or traded. Through this process of disinvestment and reinvestment savings get channelised into their most productive investment avenues. This leads to capital formation and economic growth.” “5. Spreading of Equity Cult: The stock exchange can play a vital role in ensuring wider share ownership by regulating new issues, better trading practices and taking effective steps in educating the public about investments.” |