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Role and Functioning of Stock Markets - Coursework Example

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Role and Functioning of Stock Markets

Moreover, securities markets are further broken down into a primary market and a secondary market. A stock market is a private or public market for the trading of stocks or shares in companies at an agreed upon price. These include securities listed on a stock exchange as well as those traded privately, also known as over the counter securities. A stock market is also known as an equity market (Papadopoulos, 2010). Primary Market and its Role: Primary market is the market in which newly listed companies issue their shares to be traded for the first time, changing hands from the newly listed company to the investors, mostly these first time investors are institutional investors for example pension funds, investment banks, credit unions. This process allows a company, the issuers of stocks, to acquire capital by offering their stocks to investors who in return would supply the capital required. Thereby making primary market that part of capital markets that deals with the issuance of new securities. Privately or Publicly listed Companies, governments or public sector institutions can obtain funding for there projects in this way. Security dealers act as a bridge to link lender to the borrower of the fund. The process of selling new shares is called underwriting. The new stock issue is called an initial public offering (IPO). Dealers earn a commission that is part of the price of the security offering. (Papadopoulos, 2010). Secondary Market and its Role: The secondary market is an organized marketplace for securities. After the initial offering it is through this market that the general public gets the opportunity to be a stakeholder in a company. Licensed broker assist in the buying selling of these securities, along with the exchanges specialized trading system, in accordance with the rules and regulations established by the exchange (Alfaro, Chanda, Kalemi-Ozcan, and Sayek, 2004). When it comes to secondary market, investors in this market purchase securities from other investors in the market, rather than from the issuing company. In any secondary market transaction the cash proceeds go to the investors rather than the entity of which the original securities belonged to. The prices of the securities in this market are determined by the forces of supply and demand, this rule applies to every stock available for trading (Demirguc-Kunt and Levine, 1996). Overview of the functions of Stock Market: There are several functions of stock market that makes it an integral part of the economy. It most important role is the channelling of funds or transferring of capital from investors to users of capital. This role of stock exchanges allows corporations looking to raise capital for enhancing their productive capabilities from investors in the primary market. The secondary market facilitates trade between buyers and sellers of stock and thereby enabling the investors to reach the true price of the stock or commodity. This feature of stock market is known as continuous pricing function. This feature enables interested parties to know at any time, what the price of a stock is. Price quotes can be accessed through financial websites and financial channels. This allows investors to assess the worth of their investment in a particular stock (Kale, Dyer, and Sing, 2002).  Stock market also plays the role of fair pricing. The workings of the stock market enable buyers and ...Show more


Introduction to Financial Markets: The financial markets comprise of two types of markets: Money market and capital market. Capital markets are also known as long term investment markets. This form of capital markets includes Securities market which further include stock market and bond market…
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Role and Functioning of Stock Markets essay example
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