You might have heard about stock market app varieties, stock market trade strategies and stock charts. They all serve different purposes in your journey of investing in stocks. But what purpose does the stock market serve? What are the functions of the stock market?
The history of stock exchange helps us understand that the stock market is a platform for buying and selling stocks. Well, it is a market–we know that. The stock market is a market for buying and selling stocks through a stock exchange. So, the role of the stock exchange is to facilitate the exchange of stocks in the stock market. This market is not an actual market, and buyers and investors can buy and sell or invest in stocks using stock apps, stock market trading brokers, and online stock trading portals.
Let us learn more about the functions of the stock market with the help of ten questions:
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What is the primary purpose of a stock exchange?
You might use a stock App or an online stock trading platform to buy and sell stocks. However, securities are exchanged on a stock exchange. Exchanges like the BSE (Bombay Stock Exchange) and NSE (National Stock Exchange) are mediums of stock market trading.
To participate in stock trading, you must open Demat account with a registered stockbroker.
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How is the economic barometer measured?
The health of the stock market can mirror the overall health of the economy. For example, there are times when the inflation is under check, the IIP or Index of Industrial Production shows growth, the unemployment is in check, and the PMI (Purchase Managers Index) has a decent growth scale. So, either of these factor data releases might result in stock market optimism. Similarly, with positive economic indicators, the macroeconomic indicator’s positivity can help the industries have a better business cycle. This might lead to better company results and more employment opportunities.
Thus, the stock market reading goes beyond the stock charts to being an economic barometer.
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How are securities priced?
You might have checked for a stock price on a stock market app. You would have observed that the price of a stock changes spontaneously during trading hours. Sometimes, the tick-based changes are very rapid and at times, they are slow-paced.
This is the intensity of stock market trading in India. Every Time someone buys a stock, its price rises. Similarly, the prices fall when the stock is sold.
With many buyers and sellers in the market, the prices of securities keep changing.
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How is the safety of stock market transactions measured?
The safety of transactions in stock exchange is maintained by the securities markets regulator. Since the stock market, which is part of the securities markets, is regulated by the Securities and Exchange Board of India (SEBI), all the stocks listed on the exchanges are regulated by the regulator’s norms. They are all obliged to adhere to the regulatory framework for listed companies and ensure transparency in operations and business performance. Therefore, the stock market is the safe place for all transactions related to stocks and derivatives.
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What are the benefits of spreading equity culture?
The stock exchange is a marketplace for stocks and derivatives and a place for teaching financial literacy and investor awareness. SEBI plays a major role in spreading investor awareness around the securities market’s products. Additionally, the exchanges (NSE and BSE), too, have their independent financial literacy and investor awareness endeavours that serve the purpose. Thus, the function of a stock market is beyond just a marketplace; it is a mechanism to spread equity culture among investors.
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How can investing in stocks contribute to India’s economic growth?
When you invest in a company’s stock, you become a partial owner. The company uses your invested money for regular business activities, operations, new projects, debt repayment, and other modes of business expansion.
Thus, your invested capital is driving the business towards growth. A growth business might experience efficiency and profitability. This would result in them paying more in taxes, generating more employment opportunities, and thus reducing inflation and improving the overall macroeconomic health.
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Why is liquidity important to invest in the stock market?
The stock market is entire of volatility. In fact, investors might experience higher short-term volatility than in the long term. Therefore, in case of an emergency, they might not be able to sell their shares due to unfavourable prices.
A strong emergency corpus can support the investors during such uncertainties and help them stay invested longer.
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How can investing in stocks help inculcate saving and investment habits?
Modern online stock trading portals have evolved, adding features like equity SIP. This tool can help you regularly invest in a stock over a more extended period. HDFC Sky App has a plethora of investment offerings for regular investors. Explore them here.
As you regularise your stock market investments, you can inculcate the habit of saving and investing through stocks.
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Can a stock market trade or stock market investing help in asset allocation?
Like other securities, stock investments can help you increase your long-term returns potential. They can add to your portfolio’s long-term growth potential and other investment products.
Diversification can help enhance your overall portfolio performance. Therefore, adding stocks to your portfolio can help you build a diversified and sturdy portfolio that can stand the test of time.
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How can all components of the stocks market together help in speculation?
Anyone who invests in stocks wants to earn profit. Therefore, every investor is looking for the next wave that will help the stock market jump to the next level. This concept of looking for the next wave of profitability is called speculation.
The stock exchange efficiently provides room for speculation in a regulated manner under legal provisions. The nature of the stock market is such that no wave is the last one, and everyone can get a chance to enter at an advantage. This is especially true for an emerging economy like India.
Conclusion
The function of the stock market is not limited to being a securities marketplace. It is a medium for economic growth and a driver for savings and investment among investors. As you invest or trade in the stock market, you earn profit and learn fundamental investment lessons simultaneously. The HDFC Sky App offers a variety of investment and research features to provide an edge to your stock market trading experience. Check for information on E-margins and stock baskets here.
