IMPORTANCE, FUNCTION, AND PURPOSE OF THE STOCK MARKET
Are you thinking of investing in the stock exchange? Here are some of the points that you should know about it as you set off down this road. The stock exchange, abbreviated as the SE is an integral part of the economy in any country. It enables the growth of industries by allowing investors to get money from interested parties and it also boosts commerce in an economy. The SE has a stable relationship with the economy, and its decline can lead to a fall in the economy of a nation. It is for this reason that governments, industries as well as banks keep a close eye on the market so that they can intervene where necessary. When looking at the SE, it is essential from the perspective of an investor as well as from that of the industry.
Take an example of a company. Let us say that it has grown over the years and is thus looking to expand to a new location but it lacks the necessary funds for this undertaking. In this situation, there are two options. The first involves taking a loan from a financial institution. Though this works, it also means that the company will have to work out a way in which they can pay off the debt plus the principal. The second way is through issuing of shares to the SE. You will find that most companies prefer the second option when looking to expand their operations and there are tons of reasons behind this. By issuing shares, interested parties get to own part of the company, and they are thus subject to earning dividends from their input. The company can also raise as much money as it wishes by deciding how many shares it will introduce in the market. In this way, the SE serves a vital role in the raising of capital for companies. People consider this the most critical role of the SE, but tons of other advantages stem from its existence. You see, given that the SE supports many industries in the market, a rise in the SE will thus indicate an increase in trades and therefore a boost in a nation’s economy.
Another primary function of the SE is the provision of an avenue where both sellers and buyers can meet and trade in listed stocks. In this way, if you invest in stocks by getting them from another person, you contribute to raising funds for a company. You can also sell these shares to another party at a profit, and you thus walk away with some income.
Buying and selling of stocks do not take place directly, and these processes rely on brokers. If you wish to buy shares, you start by locating a broker who will then find someone willing to part with theirs. In this way, the broker serves as a middleman, and this creates a balance between the demand and the supply. It is through these mechanisms that people get to determine the value of shares from different companies. As such, the SE not only provides a way for companies to boost their capital but it also provides a place where trading can take place.
It is through the SE that assets become liquid and thus acquiring and disposing of them takes place at fast rates. You can invest in stocks at any time and get the money spent and this is the feature that most attracts people to the SE.
The SE also offers investors a continuous marketplace for securities. Say for example you invested in a given company which is not doing as well as you expected. You can easily switch to another stock which you deem to be more profitable, and thus you increase your chances of recouping your principal. You can also tell how well a company is doing by looking at the prices of its shares. Companies in which people have an interest tend to have their shares increasing in value over time, and you can thus be in a position to evaluate trends in the market and make investment decisions accordingly.
If you have ever invested in an opportunity that turned out to be a scam, then you know how crucial it is to guard your money. Companies listed in the SE are all genuine. What’s more, they are subject to regulations, thus ensuring that you can protect your money when need be. The companies must also submit balance sheets and annual reports, allowing you to study their performance and figure out whether you should invest in them.
An indicator of economic conditions
You can see where there have been booms and depressions by looking at the workings of the SE. It also enables people to tell what led to the change in business conditions.
The SE is the driving force behind our economies and investing in it is a great way to secure future incomes.