The Roles and Functions of Stock Markets


We hear about the stock markets every day. We also know that they’re basically about companies and their wealth. Investing in them is a given, but do we really know what their roles and functions are? Here are the answers.

man using tablet to check stock markets

Fair Dealing in Asset Transactions

With the standard rules of supply and demand in mind, the stock exchange needs to guarantee all interested participants have immediate access to data for all buy and sell orders thereby helping in the fair and transparent pricing of assets. In addition, it should also perform the efficient matching of suitable buy and sell orders.

Efficient Price Discovery

Stock markets need to support an effective mechanism for price discovery, which is the act of deciding the proper price of a security and is usually performed by assessing market supply and demand and other factors associated with the transactions.

Sustained Liquidity

While getting the number of buyers and sellers for a particular financial security are out of control for the stock market, it is required to guarantee that whoever is qualified and willing to trade gets instant access to place orders, which should get executed at a fair price. This is the principle of liquidity

Security and Validity of Transactions

While a higher number of participants is crucial for the efficient working of the market, the market needs to guarantee that all participants are verified and are always compliant with the necessary rules and regulations, leaving no room for default by any of the parties.

miniature bull and bear with man on the background

In addition, it should guarantee that all associated entities that are operating in the market must also adhere to the rules and work within the legal framework given by the regulator.

Support All Eligible Participants

A marketplace is made by a plethora of participants, which include market makers, investors, traders, hedgers, and speculators.

All of these participants operate in the stock market with different roles and functions. For example, an investor may buy stocks and hold them for long term that spans many years, while a trader may enter and exit a position within seconds.

A market maker offers necessary liquidity in the market, while a hedger is someone who likes to trade in derivatives for mitigating the risks involved in the investments.  The stock market should guarantee that all types of participants are able to operate seamlessly fulfilling their desired roles to ensure that the market continues to operate efficiently.

Investors Protection

Along with the deep-pocketed and institutional investors, a very large chunk of small investors are also served by the stock market for their small amount of investments.

These investors may have limited financial knowledge and may not be fully aware of the pitfalls of investing in stocks and other listed instruments. The stock exchange must implement necessary measures to offer necessary protection to such investors to shield them from financial loss and guarantee customer trust.

Balanced Regulation of Corporates

The workings of listed companies are mainly regulated and their dealings are monitored by market regulators, like the Securities and Exchange Commission (SEC) of the US.

In addition, exchanges also mandate certain requirements, such as timely filing of quarterly financial reports and instant reporting of any relevant developments, to guarantee all market participants become aware of corporate happenings.

Failure to comply with the regulations can result to suspension of  trading by the exchanges and other disciplinary measures.

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