Question

Today, the development of a country is also judged by its system of transferring finance from the sector where it is in surplus to the sector where it is needed the most. To give strength to the economy SEBI is undertaking measures to develop the capital market. In addition to this, there is another market in which unsecured and short-term debt instruments are actively traded every day. These markets together help the savers and investors in allocating the available funds into their most productive investment opportunity.

1)Name the function being performed by the market in the above case.

2) Also, explain three other functions performed by this market.

Answer 1

1) The function is performed by the market in the given case is facilitating economic growth. By facilitating the sale and purchase of securities, the stock market helps in channelling savings to the most productive investment. This, in turn, promotes capital formation and economic growth.

2) Three other functions performed by the market:

• Provides Liquidity and Marketability: The stock exchange provides a platform for the sale and purchase of existing securities. In this way, the stock exchange facilitates the conversion of securities to cash as and when required. In addition, it renders liquidity to long-term securities which can be converted to medium-term and short-term securities.
• Determination of Prices: A stock exchange acts as a link for the interaction of buyers and sellers. In other words, it helps in the interaction of demand and supply forces and thereby helps in establishing the price of securities.
• Fair and Safe Market: A stock exchange provides a safe and fair market for the trading of securities. It functions according to a well-regulated legal framework.