Purpose of Stock Exchanges.....

Stock exchanges act as an agent for the economy by facilitating trade and disseminating information. Below are some of the ways exchanges contribute:

 
1. Raising Capital

Through initial public offerings (IPO) or issuing of new shares, companies are able to raise capital to fund operations and expansion projects. This provides companies with avenues to increase growth.

 
2. Corporate Governance

Companies that are publicly listed on a stock exchange must conform to reporting standards that are set by regulating bodies. This includes having to regularly and publicly report their financial statements and earnings to their shareholders.

The actions of a company’s management are constantly under public scrutiny and directly affect the value of the company. Public reporting helps ensure that management will make decisions that benefit the goals of the company and its shareholders, thereby acting efficiently.

 
3. Economic Efficiency

In addition to encouraging management efficiency, exchanges also facilitate economic efficiency through the allocation of capital. Stock exchanges provide an avenue for individuals to invest their cash, as opposed to merely saving these funds. This means that the capital that would otherwise be untouched is utilized towards economic benefits, resulting in a more efficient economy.

In addition, exchanges also provide liquidity, as it is relatively easy to sell one’s holdings. By providing liquidity and real-time price information on company shares, the stock exchange also encourages an efficient market by allowing investors to actively decide the value of companies through supply and demand.