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1. Raising capital for businesses


The Stock Exchange provides companies with the facility to raise capital for expansion
through selling shares to the investing public.
2. Mobilizing saving for investment
When people draw their savings and invest in shares, it leads to a more rational allocation
of resources because funds, which could have been consumed, or kept in
idle deposits with banks, are mobilized and redirected to promote business activity with
benefits for several economic sectors such as agriculture, commerce and industry,
resulting in a stronger economic growth and higher productivity levels and firms.
3. Facilitating company growth
Companies view acquisitions as an opportunity to expand product lines, increase
distribution channels, hedge against volatility, increase its market share, or acquire other
necessary business assets. A takeover bid or a merger agreement through the stock
market is one of the simplest and most common ways for a company to grow by
acquisition or fusion.
4. Redistribution of wealth
Stocks exchanges do not exist to redistribute wealth. However, both casual and
professional stock investors, through dividends and stock price increases that may result
in capital gains, will share in the wealth of profitable businesses.
6. Creating investment opportunity of small investor
As opposed to other businesses that require huge capital outlay, investing in shares is
open to both the large and small stock investors because a person buys the number of
shares they can afford. Therefore the Stock Exchange provides the opportunity for small
investors to own shares of the same companies as large investors.
7. Govt. capital- rising for development project
Governments at various levels may decide to borrow money in order to finance
infrastructure projects such as sewage and water treatment works or housing estates by
selling another category of securities known as bonds. These bonds can be raised through
the Stock Exchange whereby members of the public buy them, thus loaning money to the
government. The issuance of such bonds can obviate the need to directly tax the citizens
in order to finance development, although by securing such bonds with the full faith and
credit of the government instead of with collateral, the result is that the government must
tax the citizens or otherwise raise additional funds to make any regular coupon payments
and refund the principal when the bonds mature.
8. Barometer of the economy
At the stock exchange, share prices rise and fall depending, largely, on market forces.
Share prices tend to rise or remain stable when companies and the economy in general
show signs of stability and growth. An economic recession, depression, or financial
crisis could eventually lead to a stock market crash. Therefore the movement of share
prices and in general of the stock indexes can be an indicator of the general trend in the
economy.

Although the stock exchange market has multiple functions, its main activities are two:
• To promote the savings and for them to be canalized towards of carrying
through investment projects that otherwise wouldn’t be possible you need that the
issuing institution of the securities to be admitted for quoting. The negotiations will be
done on the primary market.
• To provide liquidity to the investors. The investor can recuperate the money invested
when needed. For it, he has to go to the stock exchange market to sell the securities
previously acquired. This function of the stock market is done on the secondary
market.
Other functions of the stock exchange market as an organization are:
• To guarantee the legal and economic security of the agreed contracts.
• To provide official information about the quantities that are negotiated and of the
quoted prices.
• To fix the prices of the securities according to the fundamental law of the offer and the
demand.
Specifying a bit more and centering on the two main agents that intervene in the market,
investors and companies, we could do the following classification:
Functions done by the stock exchange market in favor of the investor:
• It permits him the access to the profitable activities of the big companies.
• It offers liquidity to the security investments, through a place in which to sell or buy
securities.
• It permits for the investor to have a political power in the companies in which he
invests its savings due that the acquisition of ordinary shares gives him the right
(among other things) to vote in the general shareholders meetings of the company in
question.
• It offers the possibility of diversifying your portfolio by enlarging the field of strategy
of investments due to alternative options, as could be the derived market,
the money market, etc.
With respect to the function done by the stock exchange market in favor of the companies:
• It supplies them with the obtaining of long-term funds that permits the company to
make profitable activities or to do determine projects that otherwise wouldn’t be
possible to develop for lack of financing. Also, this funding signifies a less cost than if
obtained at other channels.
• The securities quoted at the stock exchange market usually have more fiscal purpose
advantages for the companies.
• It offers to the company’s free publicity, which in other way would suppose
considerable expenses. The institution is objecting of attention of the media
(television, radio, etc.) in case any important change in its owners (the share holders).
There also exists a constant following (newspapers) of the quotations.
Therefore we can see how the stock exchange market supposes a great advantage to the
companies, but there are also some inconveniences to have in mind:
• First of all, they need of a series of conditions to be apt to enter to the quotations, not
all the companies that apply can do it.
• The issuing of shares may suppose a loss of power for the founders of the company.
Anyway, this is very relative because it will depend on the grade of atomization on the
participations of the new shareholders and of the percentage of shares that the
founders keep over the total capital of the company.
• If for example a 49% of the share capital is in hands of the founders, these could loose
the control of in case the other 51% would be in hands of one main shareholder.
However, this rarely happens, due that the share capital that usually goes to the stock
market tends to be distributed between a great number of shareholders that acquire
modest participations in respect to that of the capital of the company the founders
may still keep control with share capital is distributed between a great number of
participants.
• Now then, the property of these shares implies the possession of certain rights over
the company in which you participate.
These are: political rights, among which appears the possibility of participating in the general
share holders meetings and in the administration of the company by means of the execution of
your rights to vote; and the economic right, which embraces the possibility of receiving
dividends, preferential rights of subscription, the transmission of shares (selling) and the right
to the liquidity value.
This last implies that at the moment in which the company is liquidated, what remains is
proportionally divided between the shareholders.
The possession of all these rights is what reduces the power of the founders.
• The shares may pass to be property of unknown people to the founders. At the
moment in which they are object of quotations at the stock exchange market any
supplier of capital may have them. If it’s a company that previously knew all
its shareholders, considering this as an asset of value to the company. The stock
market quotation may generate an important change that will not always be positive.
• The companies that are quoted at the stock market offer a better transparency, in a
way that the general public may have access to any information related to their
evolution and activities.
• This makes them have a greater control and to supervise every movement done.

. To be able to trade a security on a certain stock exchange, it has to be listed there.


Usually there is a central location at least for recordkeeping, but trade is less and less
linked to such a physical place, as modern markets are electronic networks, which gives
them advantages of speed and cost of transactions. Trade on an exchange is by members
only. The initial offering of stocks and bonds to investors is by definition done in
the primary market and subsequent trading is done in the secondary market. A stock
exchange is often the most important component of a stock market. Supply and demand
in stock a market is driven by various factors which, as in all free markets, affect the
price of stocks (see stock valuation).
There is usually no compulsion to issue stock via the stock exchange itself, nor must
stock be subsequently traded on the exchange. Such trading is said to be off
exchange or over-the-counter. This is the usual way that bonds are traded. Increasingly,
stock exchanges are part of a global market for securities.

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