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Essay on Stock Exchange

Essay Contents:

  1. Essay on the Meaning of Stock Exchange
  2. Essay on the Definition of Stock Exchange
  3. Essay on the Characteristics of Stock Exchange
  4. Essay on the Importance of Stock Exchange
  5. Essay on the Functions of Stock Exchange
  6. Essay on the Regulation of Stock Exchange
  7. Essay on the Advantages of Stock Exchange
  8. Essay on the Drawbacks of Stock Exchange

Essay # 1. Meaning of Stock Exchange:

Stock exchange is an important constituent of capital market. It constitutes that part of the capital market which is concerned with the purchase and sale of the industrial, government and other securities. In simple words, a stock exchange is an open market place which entertains the purchase and sale of second-hand securities.


It is a highly organised market for the purchase and sale of securities of public companies, government and semi-government bodies. In this manner, the stock exchange helps an investor to sell his holdings readily and conveniently. A stock exchange ultimately helps the inventor, the trader, the investor, the industrialist and the banker. In this context, it is described as the business of all businesses.

Essay # 2. Definition of Stock Exchange:

The stock exchange has been variously defined by different eminent authorities on the subject.

Some of the important definitions are as follows:

According to Pyle, “Security exchanges are market places where securities that have been listed thereon may be bought and sold for either investment or speculation.”


According to Garg, “A stock exchange is an association of persons engaged in the buying and selling of stocks, bonds and shares for the public on commission and are guided by certain rules and usages.”

According to Hastings, “Stock exchange or securities market comprises the places where buyers and sellers of stock and bonds or their representatives undertake transactions involving the sale of securities.”

According to Hartley Withers, “A stock exchange is something like a vast warehouse where securities are taken away from shelves and sold across the counters at a fixed price in a catalogue which is called the official list.”

The Securities Contracts (Regulation) Act, 1956. defines a 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.”

Essay # 3. Characteristics of Stock Exchange:

Following are the essential features of a stock exchange:


1. It is an organised capital market.

2. It is an association or body of individuals whether incorporated or not.

3. It is an open market for the purchase and sale of all kinds of securities, viz., shares of public companies, debentures or bonds of government and semi- government bodies.


4. It works under a code of set rules and regulations.

5. It helps the investor, the trader, the industrialist and the banker whether for investment or speculation purposes.

Essay # 4. Importance of Stock Exchange:

A stock exchange has been rightly described as the nerve centre of modern commercial world. Stock exchanges are, in fact, the theatres of business transactions and act as a gauge-glass of the politics and finances of a nation.

It has been rightly said that the modern capitalistic economy cannot exist in the absence of well organised stock exchanges. It is because stock exchanges facilitate the necessary mobilisation of capital required by companies in the business sector. They have been aptly described the, ‘shrines of values’, the ‘citadel of capital’ or ‘fortress of finance’.


In the modern times, a stock exchange has come to be recognised as the barometer of the economic progress of a nation. Bismark once advised a youngman of his country (Germany) who was going to England to study its economic progress in these words: “If you want to know how things in Britain are going on, do not study the House of Commons, but watch the London Stock Exchange.”

Prof. Marshall has rightly observed, “Stock exchanges are not merely chief theatres of business transactions, they are also barometers which indicate the general condition of the atmosphere of business.” In brief, the business of a stock exchange may be described as “the business of businesses.”

Someone has remarkably summed up its importance by describing it “as the market of the world, the nerve centre of politics and finance of a nation, the barometer of its prosperity and adversity.”

Essay # 5. Functions of a Stock Exchange:

The important functions of stock exchange are discussed below:

(i) Ready Market for Securities:


A stock exchange provides a ready market for the sale and purchase of existing securities. This facilitates the steady marketability of shares and debentures. It also provides price continuity to the investors regarding the securities they hold or intend to purchase.

It is the place where persons with cash can convert it into securities and those with securities can readily realise cash. The easy marketability of securities enhances their liquidity and, hence, increases the value of securities.

(ii) Mobilisation of Surplus Savings:

It is another important function of a stock exchange. It creates favourable climate suitable for investment of surplus funds into business sector. A stock exchange, thus, encourages savings and chanelises the funds towards industrial progress. In this manner, stock exchange mobilise savings and channelise the flow of capital into most profitable ventures.

(iii) Capital Formation:

Stock exchanges play an active role in the capital formation of a nation. Stock exchange fosters the habit of saving, investing and risk-taking among the members of general public. The funds so mobilised are directed towards business sector for meeting capital requirements. In this way, stock exchange helps in the process of capital formation.

(iv) Evaluation of Securities:


As per stock exchange rules, all transactions on the exchange are required to be “recorded and made public”. Accordingly, the prices paid and received become official quotations. This enables the holders of securities to know their actual worth at any time. Besides, the market quotation helps the lender on the security of shares to assess the value of the security.

(v) Safety of Funds:

Stock exchanges work under set rules and regulations. This ensures safety of investable funds. Thus the stock exchanges protect the interests of investors through the strict enforcement of rules and regulations. Efforts are made to check over trading, illegitimate speculation, manipulation, etc. In the absence of organised stock exchanges the innocent investors may easily be deceived at the hands of clever brokers dealing in securities.

(vi) Dependable Guide for the Investors:

Stock exchange serves as a dependable guide for the investors. Regular dealings in stock exchange sifts the profitable investment from the risky ones. With the slow magic of time, securities which offer or promise better return come in the limelight while those which have no encouraging future decline in market price. This becomes a dependable guide to the discerning investor.

(vii) Listing of Securities:

Listing of securities is a very important function of stock exchange. A stock exchange does not deal in the securities of all companies. Listing of securities here means the inclusion of securities in the official list of a stock exchange for the purpose of trading.

Listing is done only after a careful examination of the capital structure and the business prospects of the companies. Besides enhancing the prestige of the companies, it puts the investors in a better position to judge the propriety of different securities.

(viii) Supply of Useful Commercial Information:

A stock exchange provides full information regarding listed companies. Having listed the securities, a stock exchange serves as a gauge-glass of the economic health of the concerned companies. It collects necessary information regarding non-listed companies also. Such information is usually provided in their respective Annual Official Year Books. This helps the prospective investors to evaluate various investment ventures.

(ix) Facilities for Genuine Speculation:


Stock exchanges facilitate genuine speculation. The genuine traders speculate and secure sizeable gains through fluctuations in securities’ prices. In fact, speculation is an integral part of stock exchange functions. Genuine speculation tends to smoother out wide fluctuation besides bringing near-equality in demand and supply at different places.

(x) Regulation of Company Management:

The stock exchanges indirectly regulate the company management. This is achieved through listing of securities. A company has to fulfill certain conditions before official listing of its securities. Besides, the company has to maintain efficient conditions in its operations in order to prevent any decrease in market quotations of its securities. Thus, stock exchanges regulate the workings of the company management.

Essay # 6. Regulation of Stock Exchange:

The stock exchanges have to be regulated to ensure stability to protect investors from the activities of unscrupulous speculators and to maintain a healthy investment climate.

The main purposes of stock exchange regulation are:

1. To check unfair and undesirable practices detrimental to the interest of the investors.

2. To take remedial steps to minimise violent fluctuations in securities prices.


3. To provide regulatory machinery with a view to ensuring a wholesome investment climate, and

4. To limit business outside the exchange.

The stock exchanges in India were found to be suffering from administrative and operational weaknesses in the past. Instead of playing a constructive role to smooth out wide fluctuations, they became dens of gambling resulting into violent fluctuations in securities prices. Consequently, they became the instruments of vested interests highly detrimental to investors and the general public.

The need was, therefore, felt for some uniform governmental control to enforce certain set rules and to ensure security to investors. For quite a long time, there was no uniform legislation in India to regulate the workings of stock exchanges.

In 1945, Government of India appointed Dr. RJ. Thomas to enquire into the matter and to submit necessary recommendations for bringing about possible reforms. Dr. Thomas submitted his report in 21947. The government officials viewed the report and recommended a draft legislation.

In 1951, the Government of India constituted another committee under the chairmanship of Mr. A.D. Gorwala which submitted its report in the same year. The government after detailed examination of the report, presented Securities Contracts (Regulation) Bill in 1954 which was passed in 1956. The Securities Contract (Regulation) Act came into force with effect from 20th February, 1957.

Provisions of Securities Contracts (Regulation) Act:


The main provisions of the Act are listed below:

1. Recognition of Stock Exchanges:

The Act permits only the recognised stock exchanges to function. No trading is, therefore, permitted on unrecognised stock exchanges. The recognition is granted by Central Government on an application by the concerned stock exchange.

The recognition depends upon the following conditions:

(a) The rules and bye-laws of the applicant stock exchange ensure fair dealing to the investors and protect their interests;

(b) The stock exchange is willing to adhere to the conditions that may be imposed by the government from time to time; and


(c) It is the interest of the trade and the community at large to accord recognition to the exchange.

The Central Government reserves the right to refuse or withdraw recognition in the interest of the trade or the community at large after giving an opportunity to be heard.

2. Regulation through Bye-laws:

The exchange is permitted to function only according to the bye-laws approved by the government.

These may relate to:

(a) The regulation of the hours of trading at stock exchange;


(b) The maintenance and regulation of clearing house;

(c) The publication of the contracts settled or carried over by the clearing house;

(d) The determination and declaration of market rates;

(e) Regulation or prohibition of blank transfers, tatawani business and budlas.

(f) The regulations for the listing of securities on stock exchange;

(g) The fixation of scale of brokerage, fees, fines and other charges;

(h) The settlement of disputes and claims by arbitration and other means; and

(i) The fixation of business allowed to an individual member.

3. Central Government Control:

The Act empowers the Central Government to exercise an effective control over stock exchanges. The recognised stock exchanges are required to provide such information as the Central Government may demand.

The Central Government has following powers:

(a) It can call upon the exchanges to submit periodical returns relating to their affairs.

(b) The Central Government has a right to order an inquiry into the affairs of an exchange whenever it thinks necessary.

(c) It can direct a stock exchange to adopt or amend any rule relating to its constitution and organisation.

(d) It can suspend the business of a recognised stock exchange for a period of seven days or more in the interests of the trade and public.

(e) It can compel certain public companies to get their securities listed.

(f) It can prohibit dealing in any security.

4. Control on Speculation:

As stated earlier, the government can prohibit trading in any security to prevent unhealthy speculation. The Act applies to all dealings in securities except the ‘spot’ or ‘across the counter’ transactions.

The Act can, however, also regulate spot delivery contracts, if considered necessary in the interests of trade or public at large. The Act has declared kerb trading illegal. Kerb trading means the business transacted outside the stock exchange before or after its business hours.

5. Directorate of Stock Exchanges:

The government set up the Directorate of Stock Exchanges in 1959 to enforce compliance of the regulatory provisions of the Securities Contracts (Regulation) Act. The Directorate keeps a close watch on it and acts as a vital link between the government and the leading stock exchanges of the country. It has its head office in Bombay.

Essay # 7. Advantages of Stock Exchanges:

To facilitate understanding, we may divide the main advantages of stock exchanges into following three categories:

I. Advantages to Investors:

1. Safeguard of Investors’ Interest:

A stock exchange accords protection to the investors by enforcing strict rules and regulations. Thus the chances of over­trading, illegitimate speculation and manipulation get reduced.

2. Perpetual Market:

A stock exchange provides a continuous market where various types of securities are purchased and sold. Accordingly, it provides liquidity to the shareholdings. Persons with cash can convert it into securities and those with securities can get cash for them. This facilitates investment.

3. Greater Collateral Security:

The liquidity provided by stock exchanges to the securities increases, in turn, their value and enhances their use as a collateral security. The collateral value of listed securities is always higher than that of the non-listed securities.

4. Better Investment Opportunities:

The stock exchange encourages proper use of capital by providing better investment opportunities. This facilitates proper channelisation of capital or investible funds.

5. Publication of Quotations:

Stock exchanges provide full information regarding the value of securities by publishing daily quotations of listed securities. In this manner, they prove a boon to the investors.

6. Avoidance of Undue Fluctuations in Prices:

This is another important advantage of stock exchanges. The price movements are rendered smoother by the operations of speculators such as bulls and bears.

II. Advantages to Companies:

1. Better Response from Investors:

By getting its securities listed at stock exchanges, a company can command better and quicker response from the investors.

2. Higher Market Value:

Owing to greater and better facilities available at stock exchanges, the market value of the listed securities tends to be higher.

3. Widened Market:

Stock exchanges enlarge the market for trading in securities.

Through greater publicity, they provide a wider base to deal in securities of various kinds.

4. Stability in Prices:

The stock exchange also brings stability in the prices of securities by checking undue fluctuations in securities’ prices. This stability is brought about by balancing operations of speculators.

5. Increase in Goodwill:

Stock exchanges help in enhancing the goodwill of the companies whose securities are listed there. It is an established fact that a company with listed securities commands better reputation than the one whose securities are not listed.

III. Advantages to Community:

1. Mobilisation of Surplus Funds:

By attracting surplus savings, stock exchange helps in mobilising the idle funds into profitable channels. The idle savings, thus, get channelised into profitable ventures.

2. Accelerates Industrial Development:

Stock exchanges finance economic and industrial development by mobilising surplus funds. Thus, they accelerate the pace of industrial development through capital mobilisation.

3. Promotes Savings:

By providing better investment opportunities, stock exchange encourages the habit of savings among the people of general community. The inculcation of saving habits, in turn, facilitates the process of capital formation.

4. Barometer of Economic Conditions:

As stated earlier, stock exchange is referred to as the mart of the world, the nerve centre of politics and finances of a nation and the barometer of its economic prosperity or adversity.

Essay # 8. Drawbacks of Stock Exchanges:

The stock exchanges, like all other useful institutions, are not free from drawbacks. Many unscrupulous persons indulge in various malpractices to further their personal ends. They abuse the facilities afforded by these institutions.

Some people have invariably found it as a bottomless pit-worse even than all the hells. Consequently, a stock exchange is at limes condemned as a ‘den of gamblers’.

Very often, there is gambling under the garb of genuine speculation. According to S.R. Davar, “Speculation has repeatedly spread to a dangerous extent on these exchanges, bringing in its train inevitable ruin and hardship involving both the innocent and the guilty.”

Some unscrupulous traders misuse the facility of listing to manipulate the dividend policy. But, a careful study of these objections will reveal that these incidents are due more to the abuse of the facilities offered by these excellent institutions, than to the nature of the transactions they normally put through.

In conclusion it may be stated that it is not the institution of stock exchange which is to blame, but the mean and selfish elements which bring about disaster to the community at large. The qualities of self-restraint, the sporting spirit, and the mutual trust and confidence if all combined can go a long way to exercise an educative influence among stock exchange men.

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