The main function of a Stock Exchange is to act as a market for securities. In acting thus it performs a variety of functions which are vital to the development of economic activity in a nation.
- Marketability. The general public and indeed all investors would be much less willing to invest their capital in either government securities or business units (joint stock), if they were unable to realise them when they wished. In providing them an organised market where stocks and shares can be easily bought and sold, as an investor wishes, it makes for greater participation in financing of both government and industrial activities.
- Optimum portfolio. Because of the ease in purchasing or selling securities, investors can sell securities which they do not require, as they no longer give them the security, liquidity or return on capital which they require, and reinvest in more attractive ones.
- The existance of an active market ensures that the price of securities is well known and one can judge the performance of a company by the movements in the price of its shares and the frequency of transactions in these shares.
- Savings are channelled into investment which benefits the economy as a whole. Money itself will not benefit the holder except as stored purchasing power; therefore persons with surplus capital can put it to work until they require it.
- Optimum use of scarce resources: The demand for capital will be reflected by the price offered in the form of dividends. More efficient firms will have better return on capital invested and therefore find it easier to find additional financing.
- A Stock Exchange has much influence on the terms of new issues of capital and the rules and regulations of the Stock Exchange serve to protect teh investing public.
- Without the existence of Stock Exchanges it would be more difficult for Central Banks to regulate the monetary policies of countries, as Open Market operations would not be possible.