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The secondary tier of the capital markets is what’s commonly referred to as the stock market or the stock exchange, which is a virtual market where buyers and sellers trade exiting securities. It is a market hosted by institutions or by a similar government body where shares, stocks, debentures, bonds, futures, options, et cetera is traded.
You can consider a stock exchange as a meeting place for buyers and sellers. These can be brokers, agents, individuals, and other such people. The price of the asset is determined by the rules of demand and supply. Among the prominent stock exchanges around the world are the NYSE, NASDAQ, Nikkei, Shanghai Composite Index, FTSE, and BSE.
Functions
Liquidity and Marketability
One of the main drawing factors of the stock exchange is that it enable great amount of liquidity. The securities can be sold at a moment’s notice and then be converted into cash. You can say that it’s a continuous market and the investors can divest and reinvest with according to what they want.
Price Determination
In the secondary market, the only way to determine the price of securities is through the rules of supply and demand. A stock exchange enables this process through the constant valuation of all securities. Such prices of the shares from various companies can be tracked by an index.
Safety
The government strictly governs, oversees, and regulates stock exchanges. In the United States, the top governing body is the Securities and Exchange Commission. All of the transactions take place within the legal framework. This guarantees that the investor can ensure that he is trading in a safe and secure exchange.
Contribution to the Economy
A stock exchange deals with already-issued securities. However, these securities are continuously sold and resold and on. This enables the funds to be mobilized and channelized rather than just staying idle. This spurs the economy’s growth.
Spreading of Equity
The stock exchange ensures a wider ownership of securities. It actually educates the public about the safety and benefits of investing in the stock market. It ensures a better quality of transactions and smooth functioning. The idea is to get more public investors and spread the ownership of securities for the sake of everyone.
Speculation
One usually hears that the stock exchange is a speculative market. And even though this is true, the speculation is kept within the legal framework. For the purposes of liquidity and price determination, a healthy amount of speculative trading is needed. And the stock exchange offers us with such a platform.
Increased Visibility
You can probably say that there’s no better PR move for a company than to go public since the process generates free publicity and the excitement in the market place for the company. A successful IPO also means a flood of fresh cash for a newly public company and this cycle can be repeated as time goes by through secondary offerings of some more additional stock. With the flow of additional money, companies can further expand their operations or perhaps allow other companies to offer more lucrative share option packages to employees.
