What Does The Stock Market Do? – The 7 Crucial Functions

Any new investor asks himself where exactly are his acquired funds deposited. The answer is – to the stock exchange. This is the institution where all futures, stocks, bonds, and commodities are traded on a daily basis. They are also referred to as bourses. There are a total of 19 different exchanges around the world.

The biggest ones of them are the New York Stock Exchange, NASDAQ, London Stock Exchange Group, Japan Exchange Group, and the Shanghai Stock Exchange Group. Most of them operate according to the business hours of the respective country where they are located.

Which means that they work only on weekdays (Monday through Friday) and not on weekends (Saturday and Sunday). Every exchange also has a set of specific rules and regulatory impositions. All the companies that wish to work with the have to comply with these laws in order to attain the right to trade.

Good to Know:

Whenever a company or corporation is considered liable for investing on a given stock exchange, it is viewed as ‘listed’. The ones that do not but still manage to operate to favorable results are referred to as being sold Over-The-Counter (OTC). Such firms are usually small-scale and trading with them is regarded as being riskier than with the listed companies.

What Is The Purpose Of The Stock Exchange?

The most basic function of a given stock exchange is to regulate the market prices. When the NYSE was closed for business during World War I, this led to the appearance of an auxiliary market which was way more shadowy. Whenever the holder of a given business’ shares decides to sell them, he or she can do this to a given stock exchange or to a random third-party.

If there were no stock exchanges in the world, then anybody could be selling anything at the value he or she deems appropriate. This would make the global financial and economic situation very chaotic and unstable. So it can be summarized that the main purpose of these institutions is to keep the markets under control and avoid any unnecessary fluctuations.

Difference Between A Stock & Commodity Exchange

Many newcomers do not comprehend the difference between a stock and a commodity exchange. It can be summarized with the simple explanation that each one of them sells different types of assets. The stock exchange handles the shares in a given business, meaning the pieces of ownership. This allows regular people to purchase small portions of Microsoft, Google or Facebook, for example.

The commodity exchange sells all goods that are found naturally on planet Earth. Such assets can be gold, coffee, natural gas, orange juice, oil, and precious metals. Everything that is produced via the means of Mother Nature is considered a commodity.

Fun Fact:

Pork bellies are also viewed as a commodity. The exchanges that handle such assets also list the only ‘living’ asset that one can trade with – live cattle. A darker side of this is the fact that these are animals that are just about the right age and weight to be regarded as ready for slaughter. The live cattle price is driven by the weather, change of seasons, beef demand, the safety of food (whether or not the meat of the livestock is contaminated with a dangerous virus), and the value of the fiat currency in the respective nation where it is raised.

Other Functions Of The Stock Exchanges

Apart from acting as economic barometers, most of the stock exchanges around the world also have secondary responsibilities which are also viewed as very important. Such institutions are the economic mirror and pulse of a given society.

The other functions can be any of the following.

Function #1: Determine The Prices Of Securities! Securities are a crucial part of a given country’s economy. This is why it is extremely important to have someone to regulate them. This is one of the stock exchange’s main responsibilities. Creditors, investors, and governments benefit from this function.

Function #2: Ensure The Safety Of Financial Transactions! All of the companies that deal with stocks and bonds trading listed in exchanges have to comply with the rules and regulations set forth by the said institution. This creates a great degree of safety which established stable investment grounds.

Function #3: Boosts Economic Growth! Stock trading is all about the buying and selling of a company’s securities. This creates a diverse environment for a continuous disinvestment and reinvestment cycle. The most productive assets stand out which leads to the formation of capital and subsequent financial growth.

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Function #4: Provides Liquidity & Room For Healthy Speculation! The usual supply and demand rates set the right grounds for healthy speculation among traders. The consumers are also provided with the ability to immediately turn long-term investments into short- and medium-turn ones.

Function #5: Improves The Allocation Of Capital! Companies that have a lucrative portfolio are much easier to find in the stock market. Their shares are actively traded so both end traders and the people behind them can generate good daily results.

Function #6: Encourages Security Investments! The stock exchange allows everyday investors to find and come across productive trading assets and achieve financially favorable earnings. This promotes the raising of fresh capital and creates greater liquidity.

Function #7: Teaches People About The Importance Of Savings & Investments! The attractive opportunities presented by the stock market not only encourage the average Joe and Jane to invest more but also teach them the importance of spending wisely and saving more.

The Pulse Of The Economy!

The stock exchange is one of the main driving forces behind a country’s economy. It presents lucrative and financially attractive opportunities that make more people invest their earnings in a given company’s assets, stimulating the reciprocal flow of monetary transactions. Another great thing that it does is to teach average consumers the importance of the habit of always putting something aside for rainy days.