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.
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.
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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